---

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# UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549

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FORM 10-K

# ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) 
OF THE SECURITIES
EXCHANGE ACT OF 1934

---

# (Mark One)

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

For the fiscal year ended
December 31, 2005

OR

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

For the transition period from _______ to _______

Commission file number
0-538

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

|                                |                    
|------------------------------- | -------------------
|
|
|
|
|New York                        | 13-0435685         
|(State or Other Jurisdiction of | (I.R.S. Employer   
|Incorporation or Organization)  | Identification No.)

|                                         |           
|---------------------------------------- | ----------
|
|
|
|
|111 Arlozorov Street, Tel Aviv, Israel   | 62098     
|(Address of Principal Executive Offices) | (Zip Code)

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

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

---

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

Yes o  No   x

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

Yes   o    No x

Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

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

Indicate
by check mark  whether the  registrant  is an  accelerated  filer (as defined in Exchange
Act Rule 12b-2).

Yes  o   No   x

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

Yes  o No   x

The
aggregate market value of the registrants voting stock held by non  affiliates
of the registrant on June 30, 2005, the last business day of the registrants most
recently completed second fiscal quarter was $33,398,212 based upon the closing market
price of such stock on that date. As of March 6, 2006, the number of shares outstanding of
the registrants Class A Stock, its only authorized and outstanding common stock
is 20,157,772.



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# AMPAL-AMERICAN ISRAEL
CORPORATION AND SUBSIDIARIES

Index to Form 10-K

| |  |  | Page
| |  |  | ----

PART I

| |          |                                                     |   
| | -------- | --------------------------------------------------- | --
|
|
|
|
| | ITEM 1.  | BUSINESS                                            | 3 
| | ITEM 1A. | RISK FACTORS                                        | 12
| | ITEM 1B. | UNRESOLVED STAFF COMMENTS                           | 15
| | ITEM 2.  | PROPERTY                                            | 15
| | ITEM 3.  | LEGAL PROCEEDINGS                                   | 15
| | ITEM 4.  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 17

PART II

| |          |                                                                                            |   
| | -------- | ------------------------------------------------------------------------------------------ | --
|
|
|
|
| | ITEM 5.  | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF |   
| |          | EQUITY SECURITIES                                                                          | 18
| | ITEM 6.  | SELECTED FINANCIAL DATA                                                                    | 19
| | ITEM 7.  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      | 19
| | ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 | 29
| | ITEM 8.  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                | 31
| | ITEM 9.  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE       | 63
| | ITEM 9A. | CONTROLS AND PROCEDURES                                                                    | 63
| | ITEM 9B. | OTHER INFORMATION                                                                          | 63

PART III

| |          |                                                                                                |   
| | -------- | ---------------------------------------------------------------------------------------------- | --
|
|
|
|
| | ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                             | 64
| | ITEM 11. | EXECUTIVE COMPENSATION                                                                         | 67
| | ITEM 12. | SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS | 70
| | ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                 | 72
| | ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                         | 73

PART IV

| |          |                                         |   
| | -------- | --------------------------------------- | --
|
|
|
|
| | ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES | 74

2

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# ANNUAL REPORT ON FORM 10-K 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005 
OF AMPAL-AMERICAN
ISRAEL CORPORATION

# PART I

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

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

| | For
industry segment financial information and financial information about foreign and
domestic operations, see Note 13 to the Companys consolidated financial statements
included elsewhere in this Report. The companies described below under Telecommunication, High
Technology and Capital Markets and Other Holdings are included in the
Finance segment. The companies described under Real Estate are included in
the Real Estate segment. The companies described under Leisure-Time are
included in the Leisure-Time segment.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | The
Company provides its investee companies with ongoing support through its involvement in
the investees strategic decisions and introduction to the financial community,
investment bankers and other potential investors both in and outside of Israel.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 1, 2005, the Company acquired a 2% interest in East Mediterranean Gas Company,
an Egyptian joint stock company which has been given the right to export natural gas from
Egypt to Israel and other locations in the East Mediterranean basin. On October 3, 2005,
the Company sold its interest in MIRS Communications Ltd. which it held through Ampal
Communications L.P., a limited partnership controlled by Ampal and in which Ampal holds a
75% equity interest.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Listed
below by industry segment are all of the substantial investee companies in which the
Company had ownership interests as of December 31, 2005, 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), the American
Stock Exchange (AMEX) or the Tel Aviv Stock Exchange (TASE).
Further information with respect to the more significant investee companies is provided
after the following table. For additional information concerning the investee companies,
previously provided annual reports on Forms 10-K of Ampal are incorporated by reference
herein.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3

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|Industry Segment                        | Principal Business | Percentage
as of
December 31,
2005(1)
|--------------------------------------- | ------------------ | -------------------------------------
|
|
|
|
|Energy                                  |                    |                                      
|                                        |                    |                                      
|East  Mediterranean Gas Company (E.M.G) |                    |                                      
|                                        |                    |                                      
|Real Estate                             |                    |                                      
|Am-Hal Ltd                              |                    |                                      
|Ampal (Israel) Ltd                      |                    |                                      
|Bay Heart Limited                       |                    |                                      
|Ophir Holdings Ltd. ("Ophir Holdings")  |                    |                                      
|Lysh The Coastal High-way Ltd           |                    |                                      
|Meimadim Investments Ltd.               |                    |                                      
|New Horizons (1993) Ltd                 |                    |                                      
|                                        |                    |                                      
|Leisure-Time                            |                    |                                      
|Coral World International Limited       |                    |                                      
|Country Club Kfar Saba Limited          |                    |                                      
|Hod Hasharon Sport Center (1992)        |                    |                                      
|Limited Partnership                     |                    |                                      
|                                        |                    |                                      
|Finance:                                |                    |                                      
|                                        |                    |                                      
|Capital Markets and Other Holdings      |                    |                                      
|Ampal Development (Israel) Ltd          |                    |                                      
|Ampal Holdings (1991) Ltd               |                    |                                      
|Carmel Container Systems Limited        |                    |                                      
|                                        |                    |                                      
|Fimi Opportunity Fund, L.P              |                    |                                      
|                                        |                    |                                      
|High Technology                         |                    |                                      
|Telecommunication                       |                    |                                      

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

|(2) | As of December 31, 2005, Ophir Holdings held the following percentage interests:
|--- | --------------------------------------------------------------------------------

| |                                | 
| | ------------------------------ | 
|
|
|
|
| | Lysh The Coastal High-way Ltd. | 
| | Meimadim Investments Ltd.      | 
| | New Horizons (1993) Ltd.       | 

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

# Significant Developments
Since the Fiscal Year Ended December 31, 2005

| | None
| | ----

4

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# Energy

# EAST MEDITERRANEAN GAS
COMPANY (EMG)

On
December 1, 2005, the Company, through Merhav Ampal Energy, Ltd., a wholly-owned
subsidiary of the Company, entered into an agreement with Merhav M.N.F. Ltd.
(Merhav) for the purchase from Merhav of a portion of its interest in EMG.
Under the terms of the transaction, the Company acquired the beneficial ownership of 1,200
shares of EMGs capital stock, representing a 2% beneficial ownership in EMG. The
purchase price for the shares was $29,960,000. Additionally, the Company was granted the
exclusive right to negotiate to acquire a substantial portion of Merhavs remaining
shares of EMG. The Company also has the right for a period of time to require Merhav to
repurchase the EMG interest.

EMG
is an Egyptian joint stock company organized in accordance with the Egyptian Special Free
Zones system which has been given the right to export natural gas from Egypt to Israel and
other locations in the East Mediterranean basin and other countries. Egyptian natural gas
shall reach the Israeli market via an underwater pipeline owned by EMG, which EMG expects
to be completed during 2007. (See also Item 7. Related Party Transactions).

# Real Estate

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

# AM-HAL LTD.
(AM-HAL)

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

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

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

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

# AMPAL HOLDINGS (1991)
LTD. (AMPAL HOLDINGS)

In
2004, as part of the Companys reorganization of certain of its wholly owned
subsidiaries, Ampal Holdings purchased most of the high-tech investee companies from Ampal
Industries (Israel) Ltd. In 2005, Ampal Holdings sold most of its investee companies.

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

In
2004, as part of the Companys reorganization of certain of its wholly owned
subsidiaries, Ampal Israel purchased various investee companies from Ampal Industries
(Israel) Ltd.

5

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# OPHIR HOLDINGS LTD.
(OPHIR HOLDINGS)

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

Ophir
Holdings owns a 25% equity interest in Lysh The Coastal High-way Ltd.
(Lysh). Lysh has a 50% holding in Beit Herut-Lysh Development Company Ltd.
(BHL), which is constructing a 180,000 square foot commercial project for
rental near Moshav Beit Herut on land owned by the Israeli Land Authority. Ophir Holdings
has also undertaken to provide guarantees in an amount equivalent to 25% of the
construction costs. As of December 31, 2005, BHL had taken out bank loans of approximately
$14.3 million, by drawing on a credit line extended by a financial institution in
connection with the project.

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

# BAY HEART LIMITED
(BAY HEART)

Bay
Heart was established in 1987 to develop and lease a shopping mall (the Mall)
in the Haifa Bay area. Haifa is the third largest city in Israel. The Mall, which opened
in May 1991, is a three-story facility with approximately 280,000 square feet of rentable
space. The Mall is located at the intersection of two major roads and provides a large mix
of retail and entertainment facilities including seven movie theaters. The total cost of
the Mall was approximately $53 million, which was financed principally with debt
instruments. A train station on the west side of the Mall was completed in September 2001.
A transportation complex, in conjunction with a subsidiary of Egged Bus Corporation, was
opened in January 2002. The Company owns 37% of Bay Heart. Bay Heart has refinanced the
loan relating to the Mall, which loan has a fifteen years term. Bay Heart received an
additional approval for NIS. 18.5 million for renovating the Mall which started in 2005.
The Company has agreed to guarantee a portion of the new loan in an amount equal to NIS
6.8 million.

# 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 derives significant revenue
from its food and beverage facilities and retail outlets.

Coral
Worlds parks hosted 1,034,283 visitors during 2005. Coral World has approximately
220 full-time equivalent positions as of December 31, 2005.

Coral
World has entered into a joint development project for a new marine park in Palma de
Majorca which is scheduled to open at the end of 2006.

6

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# 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 1,735 member
families for the 2005 season. The Company owns 51% of Kfar Saba.

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

Hod
Hasharon operates a country club facility (the H.H. Club) in Hod Hasharon, a
town north of Tel Aviv. The H.H. Club, which opened in July 1994 and has a capacity of
1,600 member families, has operated at capacity for the past three years. In 2005, the
H.H. Club repaid owners loans of $0.2 million to each of the partners. As of
December 31, 2005, the Company holds a 50% direct interest in Hod Hasharon.

# Capital Markets And
Other Holdings

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

Ampal
Development, a wholly owned subsidiary of the Company, issued debentures which were
publicly traded on the TASE. An aggregate of approximately $2.0 million of these
debentures were outstanding as of December 31, 2004. On March 1, 2005, Ampal Development
paid off all of its outstanding and remaining debentures which were publicly traded on the
TASE.

# CARMEL CONTAINERS
SYSTEMS LIMITED (CARMEL)

Carmel
is one of the leading Israeli companies in designing, manufacturing and marketing carton
boards and packaging products. Carmel and its subsidiaries manufacture a varied line of
products, including corrugated shipping containers, moisture-resistant packaging, consumer
packaging, triple-wall packaging and wooden pallets and boxes. The Companys equity
interest in Carmel is 21.75%. As of December 31, 2005, the Company accounts for this
investment pursuant to the equity method as $2.4 million (which includes impairment in an
amount of $3.0 million).

# EMPLOYEES

On
March 31, 2004, the Company closed its New York office located at 555 Madison Ave, New
York, New York. Other than the executives officers listed in Item 11 below, Ampal has no
other employees. As of December 31, 2005, Ampal (Israel) Ltd. had 13 employees, Am-Hal
Ltd. (a wholly owned subsidiary of Ampal) had 170 employees and Country Club Kfar Saba
Ltd. (owned 51% by the Company) had 103 employees.

Relations
between the Company and its employees are satisfactory.

# CONDITIONS IN ISRAEL

Most
of the companies in which Ampal directly or indirectly invests conduct their principal
operations in Israel and are directly affected by the economic, political, military,
social and demographic conditions there. A state of hostility, varying as to degree and
intensity, exists between Israel and the Arab countries and the Palestinian Authority (the
PA). Israel signed a peace agreement with Egypt in 1979 and with Jordan in
1994. Since 1993, several agreements have been signed between Israel and Palestinian
representatives regarding conditions in the West Bank and Gaza. While negotiations have
taken place between Israel, its Arab neighbors and the PA to end the state of hostility in
the region, it is not possible to predict the outcome of these negotiations and their
eventual effect on Ampal and its investee companies. Political developments in Israel,
notably the ability of the Hamas movement to win a majority of seats in the Palestinian
parliament has increased the economic, political and military uncertainty in Israel and
the Middle East. See Item 1A Risk Factors below for further discussion of the
possible impact of this situation on the Company.

7

---

---



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

# Economic and Financial
Developments

In
2005, unemployment in Israel averaged 9.0%. The rate of unemployment in 2004 averaged
10.4% as compared to 10.7% in 2003. Management believes that the decrease resulted mainly
from the improvement in the industrial and high tech sectors and the Israeli
governments employment initiatives.

2005
was characterized by rapid growth in all components of Israeli GDP. The GDP grew by 5.2%
and the business-sector product grew by 6.7%. In 2004 and 2003, GDP growth was 4.4% and
1.7%, respectively.

The
change in consumer price index in 2005 was 2.4% compared to 1.2 % in 2004.

# CERTAIN UNITED STATES
AND ISRAELI REGULATORY MATTERS

# SEC Exemptive Order

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

# TAX INFORMATION

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

8

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

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

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

Generally,
under the provisions of the Israeli Income Tax Ordinance, taxable income from Israeli
sources paid to non-residents of Israel by residents of Israel is subject to withholding
tax at the rate of 25%. However, such rate of withholding tax may be reduced under the
Treaty, with respect to certain payments made by Israeli tax residents to US tax residents
that qualify for benefits of the Treaty. For example, under the Treaty, the rate of
withholding tax applicable to interest is generally reduced to 17.5%. The continued tax
treatment of Ampal by the Israeli tax authorities in the manner described above is based,
among other things, on Ampal continuing to be treated, for tax purposes, as a non-resident
of Israel that is not doing business in Israel. As of January 1, 2006, a different
withholding rate may apply.

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

9

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Since
January 1, 1994, the portion of the gain attributable to inflationary differences prior to
that date is taxable at a rate of 10%, while the portion of the gain attributable to
inflationary differences between such date and the date of disposition of the asset is
exempt from tax. Non-residents of Israel are exempt from the 10% tax on the inflationary
gain derived from the sale of shares in companies that are considered Israeli tax
residents if they elect to compute the inflationary portion of the gain based on the
change in the rate of exchange between Israeli currency and the foreign currency in which
the shares were purchased, rather than the change in the Israeli consumer price
index(1). The remainder of the gain (Real Capital Gain), if any, is
taxable to corporations at the rate of 25%. However, Real Capital Gains arising from the
sale of capital assets that had been acquired prior to January 1, 2003 shall be
apportioned on a linear basis to the periods before and after the same date, namely 
the portion of the gain attributed to the period before January 1, 2003 shall be subject
to tax at a rate equal to the corporate tax rate in affect at the time of the sale (in
2005  34%), whereas the portion of the gain attributed to the period after January
1, 2003 shall be taxed at the preferential rate of 25%. This 25% preferential tax rate may
also apply to a certain portion of the profit upon the sale of Israeli shares.

Foreign
corporations are generally exempt from tax on gains from the sale of shares in publicly
traded companies. Amendment No. 147 introduces a broader exemption under domestic law for
non-residents regardless of their percentage holding in an Israeli company (not holding
real estate rights) to include capital gains from the sale of securities (even where not
traded in Israel) ,which were purchased between July 1, 2005 through December 31, 2006,
provided certain conditions are met.

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. Conversely, if the depreciated cost of Fixed Assets
exceeds shareholders equity, then such excess, multiplied by the annual inflation
change, is added to taxable income.

Individuals
and companies in Israel pay VAT at a rate of 16.5% (17% until August 2005) of the price of
assets sold and services rendered. However, according to a Temporary Order issued by the
state of Israel the VAT rate was increased from 17% to 18% for the period commencing on
June 15, 2002 and ending on December 31, 2003. This period was extended by an additional
two months and was terminated on February 29, 2004, when the VAT rate was reduced back to
17%. In computing its VAT liability, Ampals Israeli subsidiaries are entitled to
claim as a deduction input VAT it has incurred with respect to goods and services acquired
for the purpose of the business.

# United States Federal
Taxation of Ampal

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

---

(1)    
          Beginning January 1, 2006, the section of the Israeli Tax Ordinance under which
          the regulations providing such tax exemption to non-Israeli residents were
          promulgated, was rescinded. It is therefore unclear whether this exemption shall
          continue to be applicable

10

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

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

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

Ampal
U.S. may also be subject to the alternative minimum tax (AMT) on corporations.
Generally, the tax base for the AMT on corporations is the taxpayers taxable income
increased or decreased by certain adjustments and tax preferences for the year. The
resulting amount, called alternative minimum taxable income, is then reduced by an
exemption amount and subject to tax at a 20% rate. As with the regular tax computation,
AMT can be offset by foreign tax credits as well as net operating losers
(NOLs) both of which are separately calculated under AMT rules and both of
which are generally limited to 90% of AMT liability as specially computed for this
purpose. The 90% limitation of the foreign tax credit allowed against AMT was repealed in
the Jobs Creation Act of 2004, effective for tax years beginning after December 31, 2004.

# FORWARD-LOOKING
STATEMENTS

This
Report (including but not limited to factors discussed in the Managements
Discussion and Analysis of Financial Condition and Results of Operations, as well as
those discussed elsewhere in this Report on Form 10-K) includes forward-looking statements
(as such term is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to the Company that are based on the beliefs of management of the
Company as well as assumptions made by and information currently available to the
management of the Company. When used in this Report, the words anticipate,
believe, estimate, expect, intend,
plan, and similar expressions, as they relate to the Company or the management
of the Company, identify forward-looking statements. Such statements reflect the current
views of the Company with respect to future events or future financial performance of the
Company, the outcome of which is subject to certain risks and other factors which could
cause actual results to differ materially from those anticipated by the forward-looking
statements, including among others, the economic and political conditions in Israel, the
Middle East, including the situation in Iraq, and in the global business and economic
conditions in the different sectors and markets where the Companys portfolio
companies operate. These risks and uncertainties include, but are not limited to, those
described in Part I, Item 1A. Risk Factors and elsewhere in this report
and those described from time to time in our future reports filed with the Securities and
Exchange Commission.

11

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

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

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

Most
of the companies in which we directly or indirectly invest conduct their principal
operations in Israel. We may, therefore, be directly affected by economic, political,
social and military conditions in the Middle East, including Israels relationship
with the Palestinian Authority and Arab countries. In addition, many of the companies in
which we invest are dependent upon materials imported from outside of Israel, including
East Mediterranean Gas Company, an Egyptian joint stock company in which we own a 2%
stake. We also have interests in companies that export significant amounts of products
from Israel. Accordingly, our operations could be materially and adversely affected by
acts of terrorism or if major hostilities should occur in the Middle East or trade between
Israel and its present trading partners should be curtailed, including as a result of acts
of terrorism in the United States. Any such effects may impact our value and the value of
our investee companies.

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

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

12

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

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

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

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

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

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

Yosef
A. Maiman, our Chairman, and other key executives have been key to the success of our
business to date. The loss or retirement of such key executives services could adversely
affect us.

Y.M. Noy Investments
Ltd.s control of us could discourage attempts to acquire us.

Y.M.
          Noy Investments Ltd., an Israeli company held approximately 58.29% of the
voting           power of our Class A Stock as of March 6, 2006. Yosef A. Maiman, the
Chairman of           our board of directors, owns 100% of the economic shares and
one-third of the           voting shares of Y.M. Noy Investments Ltd. In addition, Mr.
Maiman holds an           option to acquire the remaining two-thirds of the voting shares
of Y.M. Noy           Investments Ltd. (which are currently owned by Ohad Maiman and Noa
Maiman, the           son and daughter, respectively, of Mr. Maiman). By virtue of its
ownership of           Ampal, Y.M. Noy Investments Ltd. is able to control our affairs
and to influence           the election of the members of our board of directors. Y.M.
Noy Investments Ltd.           also has the ability to prevent or cause a change in
control of Ampal.

Because we are a
controlled company, we are exempt from complying with certain Nasdaq listing
standards.

Because
Y.M. Noy Investments Ltd. own more than 50% of our voting power, we are deemed to be a
controlled company under the rules of the Nasdaq National Market. As a result,
we are exempt from the Nasdaq rules that require listed companies to have (i) a majority
of independent directors on the board of directors, (ii) a compensation committee and
nominating committee composed solely of independent directors, (iii) the compensation of
executive officers determined by a majority of the independent directors or a compensation
committee composed solely of independent directors and (iv) a majority of the independent
directors or a nominating committee composed solely of independent directors elect or
recommend director nominees for selection by the board of directors. Accordingly, our
directors who hold management positions or who are otherwise not independent have greater
influence over our business and affairs.

13

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Our activities could be
restricted as a result of agreements between our controlling shareholder and its  lender.

Based
upon statements of beneficial ownership filed with the SEC by Y.M. Noy Investments ltd.,
Yosef A. Maiman, Ohad Maiman and Noa Maiman, the repayment of the borrowed funds used to
finance Y.M. Noy Investments Ltd.s acquisition of a controlling interest in
us, consisting of 11,444,112 shares of our Class A Stock, was principally financed by Bank
Leumi Le-Israel B.M. According to the statements of beneficial ownership, the repayment of
the borrowings are guaranteed by a personal guarantee by Mr. Maiman and secured by Y.M.
Noy Investment Ltd.s pledge of such shares of our Class A Stock to the bank.

The
statements of beneficial ownership report that the pledge agreement with the bank includes
restrictions on Y.M. Noy Investments Ltd.s voting rights and grants the bank certain
voting rights with respect to the pledged shares, and that its credit agreement with the
bank requires Y.M. Noy Investments Ltd. to maintain a controlling interest in us for so
long as any amounts remain outstanding pursuant to the credit facilities. The statements
of beneficial ownership also report that Y.M. Noy Investments Ltd. agreed that it will
cause us to not issue any shares of our Class A Stock or options to acquire shares of our
Class A Stock, except for employee stock options to our employees, consultants and
directors and provided that Y.M. Noy Investments Ltd. owns at least 50.1% of Ampal. In
addition, the statements of beneficial ownership reported that Y.M. Noy Investments Ltd.
has agreed, unless it has received the prior consent of the bank and until the borrowings
have been repaid in full, to cause us to refrain from making any decisions with regard to
our winding-up, change in corporate structure, reorganization or merger. The statements of
beneficial ownership also reported that Y.M. Noy Investments Ltd. has agreed, unless it
has received the prior consent of the bank, not to sign any voting or other agreement
regarding the shares and to oppose any change in our certificate of incorporation and
by-laws and any resolution or other act which will or might result in the dilution of Y.M.
Noy Investments Ltd.s interest in Ampal.

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

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

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

Stock
prices of companies, both domestically and abroad, are subject to fluctuations in trading
price. Therefore, as with company like ours that invests in stocks of other companies, our
book value and market price will fluctuate, especially in the short term. As of December
31, 2005, the market price on Nasdaq of $3.95 per share of our Class A Stock is less than
our book value of $4.43 per share calculated in accordance with our consolidated financial
statements. You may experience a decline in the value of your investment and you could
lose money if you sell your shares at a price lower than you paid for them.

We do not publish the
value of our assets.

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

Our Class A Stock may not
be liquid.

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

14

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

| | None.
| | -----

|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 $119,794. On March 31, 2004, the Company closed this office. The office
space has been subleased.

Country
Club Kfar Saba Ltd. occupies a 7-1/4 acre lot in the town of Kfar Saba which will be
leased for five consecutive ten-year periods, at the end of which the land returns to the
lessor. The lease expires on July 14, 2038, and lease payments in 2005 totaled $179,619.

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

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

# Ampal Communications
L.P.

1.       
          On May 10, 2004, Ampal Communications L.P., a limited partnership controlled by
          Ampal and in which Ampal holds a 75% equity interest, filed a claim in the
          Tel-Aviv District Court against Motorola Communications Israel Ltd., MIRS
          Communications Ltd.(MIRS), Motorola Israel Ltd., Elisha Yanai, Peter
          Brum, Rami Guzman, Nathan Gidron, and Shimon Tal (collectively, the
          Defendants), for injunctive and declaratory relief as described
          below. The claim is in connection with the exploitation by the defendants of
          Ampal Communications minority rights by virtue of its 33% holding in MIRS.

Ampal
Communications L.P. requested the Court to issue relief as follows:

A.       
          Declaring that the business of MIRS is conducted in such a way as to be
          prejudicial to the rights of Ampal Communications L.P. as a minority
          shareholder;

B.       
          Appointing an appraiser to conduct a valuation of MIRS and Ampal Communications
          L.P.s holdings therein, which will encompass a review of the way MIRS
          conducts its business, including a review of the related party transactions
          between MIRS and Motorola Israel Ltd. and/or any other of the Defendants;

C.       
          Instructing each of the Defendants to acquire and purchase from Ampal
          Communications L.P. the shares it holds in MIRS at the highest of the following
          prices:

(1)       
          based on a company valuation of MIRS as presented to Ampal Communications L.P.
          by Motorola prior to the signing of the Share Purchase Agreement for MIRS; or

(2)       
          based on the amount paid by Ampal Communications L.P. for its share holding in
          MIRS plus linkage to the Israeli consumer index and interest; or

15

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(3)       
          based on the company valuation that will be determined by the valuation
          specified in Section B above, excluding any material negative effect brought
          about by the Defendants omissions and/or negligence in their management of
          MIRS, all as may be assessed and computed by the appraiser specified in Section
          B above;

D.       
          Determining that each of the individual Defendants, as officers in MIRS, has
          violated his respective fiduciary obligations towards Ampal Communications L.P.
          as a minority shareholder in MIRS; and

E.       
          Declaring that the Share Purchase Agreement pursuant to which Ampal
          Communications L.P. acquired its shareholding in MIRS and the Shareholders
          Agreement in respect thereof, are void.

2.       
          On May 24, 2004 and on May 31, 2004 the Defendants requested the district court
          to strike out the claim in limine, on the grounds that Ampal had allegedly not
          paid sufficient fees when filing the claim, and further requested an extension
          of the time for filing statements of defense until after the district court had
          reached a decision regarding the request to strike out the claim. Ampal and the
          Defendants filed various responses and on June 30, 2004, the district court
          requested the Attorney General to furnish an opinion regarding the
          Defendants request before issuing its own decision. On October 11, 2004
          the Attorney General furnished its opinion that supported the Defendants
          request that Ampal should pay the fees calculated on the basis of the value of
          the requested remedies in the claim.

On
November 10, 2004 Ampal filed its response. The Court also decided that the statements of
defense should be filed 10 days after it issues its decision regarding the striking out of
the claim.

3.       
          On March 1, 2005, Ampal requested the district court to enter judgment against
          Peter Brum on the grounds that he failed to file a defense to the Companys
          claim. On March 15, 2005, the district court granted Ampals request and
          entered judgment against Peter Brum. On March 17, 2005, the district court
          ordered Mr. Brum to acquire and purchase from Ampal the shares it holds in MIRS
          for a total company valuation of $ 765,998,000, which is the highest of the
          prices set forth in the complaint. The litigation with regard to the other
          defendants is ongoing. Peter Brum, Motorola and MIRS have appealed the district
          courts judgment on numerous grounds. Ampal has filed responses to the
          appeal.

4.       
          On August 30, 2005, the Company, through Ampal Communications L.P. entered into
          a Stock Purchase and Indemnification Agreement, dated as of August 30, 2005, by
          and among Motorola Israel Ltd., Ampal Communications L.P. and MIRS (the
          Agreement) to sell Motorola Israel Ltd. all of its holdings of MIRS.
          In connection with the closing of the transactions contemplated by this
          Agreement the existing lawsuit among the parties and other relating to MIRS was
          dismissed.

5.       
          On October 3, 2005 the Company, through Ampal Communications L.P., completed the
          sale to Motorola Israel Ltd. of all of its holdings of MIRS pursuant to the
          Agreement. In connection with the sale of its holdings of MIRS, Ampal
          Communications L.P. received approximately US $89 million of total proceeds,
          composed of $67.7 million for the purchase price and an additional $ 21.3
          million related to guaranteed dividend payments. Approximately $ 74.0 million of
          the proceeds was used to repay all outstanding debt to banks incurred in
          connection with making the MIRS investment, and the Company received US$ 15.0
          million ($11.0 million after the deduction of minority interest) of net proceeds
          from the sale.

# 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 10,249,609
($2.2 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 4,022,085 ($873,800) if a final judgment against the Company will be given.

16

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

# Claims Against
Subsidiaries and Affiliates:

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.

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

| | None.
| | -----

17

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PART II

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

# 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 2005 and 2004, 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
|-------------- | ---- | ---
|
|
|
|
|2005:          |      |    
|Fourth Quarter |      |    
|Third Quarter  |      |    
|Second Quarter |      |    
|First Quarter  |      |    
|               |      |    
|               |      |    
|2004:          |      |    
|Fourth Quarter |      |    
|Third Quarter  |      |    
|Second Quarter |      |    
|First Quarter  |      |    

As
of March 6, 2006, there were approximately 731 record holders of Class A Stock.

# VOTING RIGHTS

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

# DIVIDEND POLICY

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

18

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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 18, 2005, Ampal announced that its Board had declared
cash dividends on its classes of preferred stock ($0.325 per share on its 6 1/2% classes
of preferred stock and $0.20 per share on its 4% Preferred Stock). The dividends were paid
on December 30, 2005.

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

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

|                                       | Fiscal year ended December 31,
|-------------------------------------- | ------------------------------
|
|
|
|
|Revenues                               |                               
|                                       |                               
|Net income (loss)                      |                               
|Earnings (loss) per Class A Share(1):  |                               
|Basic EPS                              |                               
|Diluted EPS                            |                               
|Total assets                           |                               
|                                       |                               
|Notes and loans and debentures Payable |                               

|(1) | Computation is based on net income (loss) after deduction of preferred stock
                    dividends (in thousands) of $191, $200, $213, $218 and $227 for the years ended
                    2005, 2004, 2003, 2002 and 2001, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

# OVERVIEW

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

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

19

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

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

For
those subsidiaries and affiliates whose functional currency is considered to be the New
Israeli Shekel (NIS), assets and liabilities are translated at the rate of
exchange at the end of the reporting period and revenues and expenses are translated at
the average rates of exchange during the reporting period. Translation differences of
those foreign companies financial statements are included in the cumulative
translation adjustment account (reflected in accumulated other comprehensive loss) of
shareholders equity. Should the NIS be devalued against the U.S. dollar, cumulative
translation adjustments are likely to result in a reduction in shareholders equity.
As of December 31, 2005, the accumulated effect on shareholders equity was a
decrease of approximately $19.7 million. Upon disposition of an investment, the related
cumulative translation adjustment balance will be recognized in determining gains or
losses.

# CRITICAL ACCOUNTING
POLICIES

The
preparation of Ampals consolidated financial statements is in conformity with
accounting principles generally accepted in the United States which requires management to
make estimates and assumptions in certain circumstances that affect amounts reported in
the accompanying consolidated financial statements and related footnotes. Actual results
may differ from these estimates. To facilitate the understanding of Ampals business
activities, described below are certain Ampal accounting policies that are relatively more
important to the portrayal of its financial condition and results of operations and that
require managements subjective judgments. Ampal bases its judgments on its
experience and various other assumptions that it believes to be reasonable under the
circumstances. Please refer to Note 1 to Ampals consolidated financial statements
included in this Annual Report for the fiscal year ended December 31, 2005 for a summary
of all of Ampals significant accounting policies.

20

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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

Our
investment in MIRS, which we sold on October 3, 2005, was accounted for at cost (our
equity interest was 25%). The cost method was applied due to preference features we were
granted in our investment in preferred shares in MIRS. Revenues from guaranteed dividend
payments from Motorola were recognized as income. We performed annual tests for impairment
regarding our investment in MIRS. Our assessment of our investment in MIRS as of December
31, 2005, resulted in an impairment charge of $13.3 million (see also, Item 1
Business, Results of Operations and Debt below and
Note 2 to the Consolidated Financial Statements).

Marketable Securities

We
determine the appropriate classification of marketable securities at the time of purchase.
We hold marketable securities classified as trading securities that are carried at fair
value, and marketable securities classified as available-for-sale that are carried at fair
value with unrealized gains and losses included in the component of accumulated other
comprehensive loss in stockholders equity. We classify investment in marketable
securities as investment in trading securities, if those securities are bought and held
principally for the purpose of selling them in the near term (held for only a short period
of time). All the other securities are classified as available for sale securities.

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

Long- lived assets

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

21

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Accounting for
Income Taxes

As
part of the process of preparing our consolidated financial statements, we are required to
estimate our income taxes in each of the jurisdictions in which we operate. This process
involves us estimating our current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are included in our
consolidated balance sheet. We must then assess the likelihood that our deferred tax
assets will be recovered from future taxable income, and, to the extent we believe that
recovery is not likely, we must establish a valuation allowance. To the extent we
establish a valuation allowance or increase this allowance in a period, we must include an
expense within the tax provision in the statement of operations. A valuation allowance is
currently set against certain tax assets because management believes it is more likely
than not that these deferred tax assets will not be realized through the generation of
future taxable income. We also do not provide for taxes on undistributed earnings of our
foreign subsidiaries, as it is our intention to reinvest undistributed earnings
indefinitely outside the United States. In 2005, there were no undistributed earnings from
foreign subsidiaries.

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

# RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS

# FAS 123 (Revised 2004)
Share-based Payment

In
December 2004, the Financial Accounting Standards Board (FASB) issued the
revised Statement of Financial Accounting Standards (FAS) No. 123, Share-Based
Payment (FAS 123R), which addresses the accounting for share-based payment transactions in
which the Company obtains employee services in exchange for (a) equity instruments of the
Company or (b) liabilities that are based on the fair value of the Companys equity
instruments or that may be settled by the issuance of such equity instruments. In March
2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SECs
interpretation of FAS 123R.

FAS
123R eliminates the ability to account for employee share-based payment transactions using
APB Opinion No. 25  Accounting for Stock Issued to Employees, and
requires instead that such transactions be accounted for using the grant-date fair value
based method. This Statement will be effective as of the beginning of thefirst
interim period after June 15, 2005 (January 1, 2006 for the Company). Early adoption of FAS
123R is encouraged. This Statement applies to all awards granted or modified after the
Statements effective date. In addition, compensation cost for the unvested portion
of previously granted awards that remain outstanding on the Statements effective
date shall be recognized on or after the effective date, as the related services are
rendered, based on the awards grantdate fair value as previously calculated for the
pro-forma disclosure under FAS 123.

The
Company estimates that the cumulative effect of adopting FAS 123R, as of its adoption date
by the Company (January 1, 2006), based on the awards outstanding as of December 31, 2005,
will not be material. This estimate does not include the impact of additional awards,
which may be granted, or forfeitures, which may occur subsequent to December 31, 2005 and
prior to the adoption of FAS 123R.

The
Company expects that upon the adoption of FAS 123R, the Company will apply the modified
prospective application transition method, as permitted by the Statement. Under such
transition method, upon the adoption of FAS 123R, the Companys financial statements
for periods prior to the effective date of the Statement will not be restated.

The
Company expects, based on the awards outstanding as of December 31, 2005, that this
statement will have an estimated effect of $0.8 million on its financial position
and results of operations in 2006.

22

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# FAS 154 -
Accounting  Changes and Error  Corrections - a replacement  of APB Opinion No. 20 and FASB  Statement No. 3

In
June 2005, the Financial Accounting Standards Board issued FAS No. 154,Accounting
Changes and Error Corrections  a replacement of APB Opinion No. 20 and FASB
Statement No.3". This Statement generally requires retrospective application to prior
periods financial statements of changes in accounting principle. Previously, Opinion
No. 20 required that most voluntary changes in accounting principle were recognized by
including the cumulative effect of changing to the new accounting principle in net income
of the period of the change. FAS 154 applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement in the
unusual instance that the pronouncement does not include specific transition provisions.
When a pronouncement includes specific transition provisions, those provisions should be
followed. This Statement shall be effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005 (2006 for the Company). We
do not expect the adoption of this statement will have a material impact on our results of
operations, financial position or cash flow.

# RESULTS OF OPERATIONS

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

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

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

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

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

23

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

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

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

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

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

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

# SELECTED QUARTERLY
FINANCIAL DATA

|                                     | First
Quarter | Second
Quarter | Third
Quarter | Fourth
Quarter
|------------------------------------ | ------------- | -------------- | ------------- | --------------
|
|
|
|
|Fiscal Year Ended December 31, 2005  |               |                |               |               
|Revenues                             |               |                | $             | 15,634        
|Net interest expense                 |               |                |               | (1,017        
|Net (loss) income                    |               |                |               | 6,728         
|Basic EPS:                           |               |               
|Earnings (Loss) per Class A share(1) |               |                |               | 0.33          
|Diluted EPS:                         |               |               
|Earnings (Loss) per Class A share    |               |                |               | 0.30          
|                                     |               |               
|
|
|
|                                     |               |               
|Fiscal Year Ended December 31, 2004  |               |               
|Revenues                             |               |                | $             | 7,469         
|Net interest expense                 |               |                |               | (715          
|Net (loss) income                    |               |                |               | (811          
|Basic EPS:                           |               |               
|Earning (Loss) per Class A share(1)  |               |                |               | (0.04         
|Diluted EPS:                         |               |               
|Earning (Loss) per Class A share     |               |                |               | (0.04         



|(1) | After  deduction of dividends on the 4% and 6 1/2% Cumulative Convertible Preferred Stock in 2005
and 2004 (in thousands) of $191 and $200, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

See note 17 to the Company
Consolidated Annual Statements which describe management decision to correct the
disclosure provided by the Statements of Comprehensive Income (Loss) contained in the
Companys periodic reports on Form 10-Q for the three months ending March 31, 2005,
six months ending June 30, 2005 and nine months ending September 30, 2005.

Fiscal year ended December 31,
2004 compared to fiscal year ended December 31, 2003:

The
Company recorded a consolidated net loss of $18.4 million for the fiscal year ended
December 31, 2004, as compared to $8.8 million gain for the same period in 2003. The
decrease in net income is primarily attributable to the increase in losses from impairment
of investments and decreases in realized and unrealized gain on investments in marketable
securities. The decrease was partially offset by higher income from equity in and
translation gains, 2004, as compared to 2003.

24

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In
the fiscal year ended December 31, 2004, the Company recorded $38.8 million in losses from
the impairment of its investments and loans which was comprised primarily of the following
losses: MIRS ($30.0 million), ShellCase ($3.8 million) and Star Management ($1.6 million).
In the fiscal year ended December 31, 2003, the Company recorded $13.1 million in losses
from the impairment of its investments and loans which was comprised primarily of the
following losses: XACCT ($9.0 million), Carmel ($2.0 million) and Identify ($1.3 million).

During
the fiscal year ended December 31, 2004, Ampal recorded $7.9 million of realized and
unrealized gains on investments, as compared to $29.8 million of realized and unrealized
gains in the same period in 2003. The gains recorded in 2004 are mainly attributable to
the sale of assets by PSINet Europe, one of the holdings of Ampals investee company,
Telecom Partners (TP)($2.5 million), (see Investments) and
approximately 49% of the Companys holdings in PowerDsine Ltd.
(PowerDsine) ($3.5 million). The remaining shares of PowerDsine were treated
as available-for-sale and $2.9 million were recorded as unrealized gains on
marketable securities under, Accumulated Other Comprehensive Loss. The
realized and unrealized gains on investments in 2003 were primarily attributable to the
gains on the sale of the Companys investment in Granite Hacarmel Investments Ltd.
(Granite) ($20.7 million), Blue Square Israel Ltd. (Blue Square)
($2.6 million), Alvarion ($1.4 million), and mutual funds and other securities ($5.1
million).

During
2003, the Company reduced its holding interest in Granite from 20.4% to 10.5% as a result
of a sale of 9.9%. Consequently, the Companys investment in Granite, which was
previously accounted for by the equity method, was accounted for as an investment in a
trading marketable security. The remaining 10.5% interest in Granite was sold in February
2004.

Equity
in earnings of affiliates increased to $4.0 million for the fiscal year ended December 31,
2004 as compared to $2.5 million for the fiscal year ended in 2003. In 2003, a loss of
$1.7 million was recorded during the first quarter with respect to the Companys
holdings in Granite.

The
increase in real estate income and expenses in 2004 as compared to 2003 is primarily
attributable to the increase in the tenant occupancy rate in Am-Hal Ltd.

Other
income realized by the Company is principally composed of guaranteed dividend payments
from Motorola equal to $7.1 million for the years ended December 31, 2004 and
2003.

The
Company recorded lower interest expense in the fiscal year ended December 31, 2004, as
compared to the same period in 2003, primarily as a result of repayment of loans.

In
the fiscal year ended December 31, 2004, Ampal recorded $10.2 million of tax benefit which
related mainly to the loss from the impairment in our investment in Mirs.

# LIQUIDITY AND CAPITAL
RESOURCES

Cash Flows

On
December 31, 2005, cash, cash equivalents and marketable securities were $62.9million, as compared with $68.1 million at December 31, 2004.

25

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The
Company has sources of cash from operations, cash from investing activities and amounts
available under credit facilities, as described below. The Company believes that these
sources are sufficient to fund the current requirements of operations, capital
expenditures, investing activities, 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. 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 Ophir Holdings Ltd. and government debenture notes equal to $9
million have already been pledged as security for various 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 $43.2 million for the fiscal
year ended December 31, 2005, as compared to approximately $13.1 million provided by the
same period in 2004. The change is primarily attributable to (i) the $19.7 million net
proceeds from the sale of securities ($32.6 million proceeds offset by $12.9 million
invested) as compared to $23.0 million net proceeds from the sale of securities in 2004,
(ii) receipt of a $21.3 million dividend from MIRS as part of the sale of MIRS to Motorola
Communication Israel Ltd. and (iii) the $4.3 million in dividend payments received from
affiliates as compared to $3.3 million in dividend payments received from affiliates in
2004.

Cash flows from
investing activities

Net
cash provided by investing activities totaled approximately $36.7 million for the fiscal
year ended December 31, 2005, as compared to approximately $17.7 million provided by for
the same period in 2004. The cash provided by investing activities is primarily
attributable to the proceeds in the amount of $75.4 million from the disposition of MIRS,
High-Tech Portfolio, Epsilon Group, Xpert, Modem Art and certain assets of TP. The cash
receipts were offset by our approximately $30 million investment in EMG and a payment of
$9.8 million by Am-Hal Ltd. (Am-Hal), a wholly owned subsidiary of the
Company, to acquire and develop real estate for a new project in Tel-Aviv.

Cash flows from
financing activities

Net
cash used in financing activities was approximately $73.5 million for the fiscal year
ended December 31, 2005, as compared to approximately $19.1 million of net cash used in
financing activities for the fiscal year ended December 31, 2004.

The
increase in cash used in financing activities is primarily attributable to the repayment
in full of the $73.1 million loan which was received from Bank Hapoalim Ltd and Bank Leumi
Le-Israel Ltd relating to the MIRS investment, the repayment of $2.5 million of loans by
Am-Hal and Ampal which used its own cash to pay down its existing notes payable and
debentures in the amount of $5.3 million. Those effects were offset by Am-Hal Ltd. and its
minority partner in the new project which borrowed $8.8 million to finance the new project
(see cash flow from investing activities). In 2004, the Company paid down its notes
payable and debentures in the amount of $18.9 million with cash on hand and by borrowing
funds in the amount of $6.5 million.

Investments

On
December 31, 2005, the aggregate fair value of trading and available-for-sale securities
were approximately $38.6 million, as compared to $50.4 million at December 31, 2004. The
decrease in 2005 is attributable to the sale of tradable securities in order to finance
the $30 million investment in EMG.

26

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|a) | In
2005, the Company made the following investments:
|-- | ----------------------------------------------------

| | 1. | On
December 1, 2005, the Company acquired a 2.0% interest in EMG from Merhav           for
$29,960,000. EMG is an Egyptian joint stock company organized in accordance
          with the Egyptian Special Free Zones system which has been given the right to
          export natural gas from Egypt to Israel and other locations in the East
          Mediterranean basin and other countries. (See also Item 7. Related Party
          Transaction).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | An
additional investment of $0.7 million in Fimi Opportunity Fund, L.P.           (Fimi).
| | -- | -------------------------------------------------------------------------------------------

|b) | In
2005, the Company made the following dispositions:
|-- | -----------------------------------------------------

| | 1. | On
October 3, 2005 the Company, through Ampal Communications L.P., completed           the
sale to Motorola Israel Ltd. of all of its holdings of MIRS. In connection           with
the sale of its holdings of MIRS, Ampal Communications L.P. received
          approximately US $89 million of total proceeds, composed of US $67.7 million
for           the purchase price and an additional US $21.3 million related to guaranteed
          dividend payments.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | During
the third and fourth quarter of 2005, one of the holdings of           Ampals
investee companies, TP received proceeds in the amount of $1.1           million from the
sale of all its assets in Grapes Communications N.V./S.A. and           from the
disposition of its holdings in PSINet Europe B.V.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | On
September 7, 2005 a third-party Israeli based venture fund and certain of           its
affiliated companies invested $2.65 million in the Companys high-tech           and
communications portfolio. Ampal received $2.5 million in connection with           this
transaction. The Company treated this investment as a disposition for
          accounting purposes and recorded a loss of $7.3 million ($4.6 million after
          taxes).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | On
August 15, 2005 the Company sold its holdings in Epsilon Investment House           Ltd.
and Renaissance Investment Company Ltd. for $2.0 million and recorded a           $1.4
million gain.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | On
July 11, 2005, the Company sold its holdings in Xpert Ltd. for $0.8 million           and
recorded a loss of $0.2 million.
| | -- | -----------------------------------------------------------------------------------------------------------------------------

| | 6. | On
March 8, 2005, the Company sold its holdings in Modem Art Ltd. for $4.4           million
and recorded a gain of $3.3 million.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------

Related Party
transaction

On
December 1, 2005, the Company acquired an interest in EMG from Merhav. EMG is an Egyptian
joint stock company organized in accordance with the Egyptian Special Free Zones system
which has been given the right to export natural gas from Egypt to Israel and other
locations in the East Mediterranean basin and other countries. Egyptian natural gas shall
reach the Israeli market via an underwater pipeline owned by EMG, which EMG expects to be
completed during 2007. Under the terms of the transaction, the Company acquired a 2%
beneficial ownership in EMG for a purchase price of $29,960,000. Additionally, the Company
was granted the exclusive right to negotiate to acquire a substantial portion of
Merhavs remaining shares of EMG. The Company also has the right for a period of time
to require Merhav to repurchase the EMG interest.

Yosef
A. Maiman, the chairman of the Companys Board of Directors and the Companys
controlling shareholder, is the sole owner of Merhav. The transaction was approved by a
special committee of the Board of Directors composed of the Companys independent
directors. Houlihan Lokey Howard & Zukin Financial Advisors, Inc. acted as financial
advisors to the special committee.

27

---

---



Debt

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 Israel Shekels, with interest rates
varying depending upon their linkage provision and mature between 2006-2010.

The
Company financed a portion of the $9.8 million real estate acquisition by Am-Hal, a
wholly-owned subsidiary of the Company, which develops and operates luxury retirement
centers for senior citizens, through a revolving credit facility from Hapoalim, Phoenix
Insurance Company and others. On December 1, 2005, a loan agreement creating the facility
was signed between Am-Hal, Phoenix Insurance Company and others. Pursuant to the loan
agreement, the lenders granted the Company a revolving credit facility in Israeli Shekels
equal to $12.5 million. The annual interest rate on the loan, which matures in 10 years,
is 7.5%. The interest rate and the principal of the loan will be adjusted based on the
changes in the Israeli Consumer Price Index. As of December 31, 2005 the Company had drawn
$2.5 million from the facility. As of December 31, 2005 and December 31, 2004 the amounts
outstanding under these loans were $13.5 million and $7.7 million, respectively. The
loans, excluding the Phoenix loan, mature in up to one year and have interest rates range
between 5.4% and 7.5%. The Company generally repays these loans with the proceeds received
from deposits and other payments from the apartments in Am-Hal facilities. The loans are
secured by a lien on Am-Hals properties. The Company also issued guarantees in the
amount of $3.6 million in favor of tenants of Am-Hal in order to secure their deposits.

The Company also finances its general operations and other financial commitments
through bank loans with Hapoalim. The long-term loans in the amount of $31.3 million
mature through 2006-2010.

Other
long term borrowings in the amount of $1.9 million are linked to the Israeli C.P.I and
mature between 2006 and 2010 of which an amount of $1.4 million bears no interest. The
remaining $0.5 million bears an annual interest of 5.7%.

The
weighted average interest rates on the balances of short-term borrowings at year-end are
as follows: 6.0% on $15.0 million and 3.5% on $13.0 million in 2005 and 2004,
respectively.

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

|(1) | See
note 15(d)
|--- | --------------

|(2) | See
note 15(a)
|--- | --------------

28

---

---



As
of December 31, 2005, the Company had issued guarantees on certain outstanding loans to
its investees and subsidiaries in the aggregate principal amount of $10.3 million. This
includes:

| | 1. | $5.8
million guarantee on indebtedness incurred by Bay Heart ($3.5 million of
               which is recorded as a liability in the Companys financial
statements at                December 31, 2005) in connection with the development of its
property. Bay Heart                recorded losses in 2005 as a result of decreased
rental revenues. There can be                no guarantee that Bay Heart will become
profitable or that it will generate                sufficient cash to repay its
outstanding indebtedness without relying on the                Companys guarantee.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | $3.6
million guarantee to Am- Hal tenants as described above.
| | -- | -------------------------------------------------------------

| | 3. | $0.9
million guarantee to Galha 1960 Ltd. as described in Item 3 of this Report.
| | -- | --------------------------------------------------------------------------------

In
each of 2005 and 2004, Ampal paid dividends in the amount of $0.20 and $0.325 per share on
its 4% and 6 1⁄2% Cumulative Convertible Preferred Stocks, respectively. Total
dividends paid in each year amounted to approximately $0.2 million.

Off-Balance Sheet
Arrangements

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

Foreign Currency
Contracts

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

As
of December 31, 2005, the Company did not have any open foreign currencyforward
exchange contracts to purchase or sell U.S. Dollars.

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

# MARKET RISKS AND
SENSITIVITY ANALYSIS

The
Company is exposed to various market risks, including changes in interest rates, foreign
currency rates and equity price changes. The following analysis presents the hypothetical
loss in earnings, cash flows and fair values of the financial instruments which were held
by the Company at December 31, 2005, and are sensitive to the above market risks.

During
the fiscal year ended December 31, 2005, 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, 2004.

29

---

---



# Interest Rate Risks

At
December 31, 2005, the Company had financial assets totaling $21.4 million and financial
liabilities totaling $50.4 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, 2005, the Company had fixed rate financial assets of $0.3 million and had
variable rate financial assets of $21.1 million.  A ten percent decrease in interest
rates would increase the unrealized fair value of the fixed rate assets by approximately
$0.1 million.

At
December 31, 2005, the Company had fixed rate debt of $5.0 million and variable rate debt
of $45.4 million. A ten percent decrease in interest rates would increase the unrealized
fair value of the financial debts in the form of the fixed rate debt by approximately $0.1
million.

The
net decrease in earnings for the next year resulting from a ten percent interest rate
increase would be approximately $0.2 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 2005, the Company entered into
various foreign exchange forward purchase contracts to partially hedge this exposure. At
December 31, 2005, the Company didnt have any open foreign exchange forward purchase
contracts. Holding other variables constant, if there were a ten percent devaluation of
the foreign currency, the Companys cumulative translation loss reflected in the
Companys accumulated other comprehensive loss would increase by $1.2 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 $2.0 million.

# Equity Price Risk

The
Companys investments at December 31, 2005, included marketable securities which are
recorded at fair value of $38.6 million, including a net unrealized gain of $0.4 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 $3.9 million.

30

---

---



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

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying
consolidated balance sheets of Ampal-American Israel Corporation and subsidiaries (the
Company) as of December 31, 2005 and 2004, and the related consolidated
statements of income (loss), cash flows, changes in shareholders equity, and
comprehensive income (loss) for each of the three years in the period ended December 31,
2005. These financial statements are the responsibility of the Companys Board of
Directors and management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We did not audit the financial
statements of certain subsidiaries, whose revenues included in consolidation constitute
approximately 14.5% of total consolidated revenues for the year ended December 31, 2003.
Also we did not audit the financial statements of certain affiliated companies, the
companys interest in which as reflected in the balance sheets as of December 31,
2005 and 2004 is $14,001 thousands and $13,345 thousands, respectively, and the
Companys share in excess of profits over losses in a net amount of $88 thousands,
$1,931 thousands and $676 thousands for the years ended December 31, 2005, 2004 and 2003,
respectively. The financial statements of those subsidiaries and affiliated companies were
audited by other independent registered public accounting firms whose reports thereon have
been furnished to us and our opinion expressed herein, insofar as it relates to the
amounts included for those companies, is based solely on the reports of the other
independent registered public accounting firms. We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Boards (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other independent
auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits
and the reports of other independent registered public accounting firms, the financial
statements referred to above present fairly, in all material respects, the financial
position of the Company and its subsidiaries as of December 31, 2005 and 2004, and the
results of their operations and their cash flows for each of the three years in the period
ended December 31, 2005, in conformity with accounting principles generally accepted in
the United States of America.

Tel Aviv, Israel 
March 29, 2005

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

31

---

---



# AMPAL-AMERICAN ISRAEL
CORPORATION AND SUBSIDIARIESCONSOLI 
DATED STATEMENTS OF INCOME (LOSS)

|                                                           | Fiscal Year Ended December 31,
|---------------------------------------------------------- | ------------------------------
|
|
|
|
|REVENUES:                                                  |                               
|Equity in earnings of affiliates (Note 11)                 |                               
|Real estate income                                         |                               
|Realized gains on investments (Note 2)                     |                               
|Realized and unrealized gains on marketable securities     |                               
|(Loss) gain on sale of real estate rental                  |                               
|property (Note 2 )                                         |                               
|Interest income                                            |                               
|Other  Income (note 12)                                    |                               
|                                                           |                               
|Total revenues                                             |                               
|                                                           |                               
|                                                           |                               
|EXPENSES:                                                  |                               
|Interest expense                                           |                               
|Real estate expenses                                       |                               
|Realized losses on investments (Notes 2 )                  |                               
|Loss from impairment of investments & real estate (Note 2) |                               
|Translation (gain) loss                                    |                               
|Other (mainly general and administrative)                  |                               
|                                                           |                               
|Total expenses                                             |                               
|                                                           |                               
|(Loss) Income before income taxes                          |                               
|Provision for income taxes (tax benefits) (Note 10)        |                               
|                                                           |                               
|                                                           |                               
|(Loss) Income after income taxes (tax benefits)            |                               
|Minority interests, net                                    |                               
|                                                           |                               
|NET (LOSS) INCOME                                          |                               
|                                                           |                               
|                                                           |                               
|Basic EPS: (Note 9)                                        |                               
|(Loss) earnings per Class A share                          |                               
|                                                           |                               
|Shares used in calculation (in thousands)                  |                               
|                                                           |                               
|                                                           |                               
|Diluted EPS:                                               |                               
|(Loss) earnings per Class A Share                          |                               
|                                                           |                               
|Shares used in calculation (in thousands)                  |                               
|                                                           |                               

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

32

---

---



# AMPAL-AMERICAN ISRAEL
CORPORATION AND SUBSIDIARIES 
CONSOLIDATED BALANCE SHEETS

|                                                               | Assets As At
|-------------------------------------------------------------- | ------------
|
|
|
|
|Cash and cash equivalents                                      |             
|                                                               |             
|                                                               |             
|Deposits, notes and loans receivable                           |             
|Investments (Notes 2, 3 and 11):                               |             
|Marketable securities (Note 3)                                 |             
|Other investments                                              |             
|                                                               |             
|Total investments                                              |             
|                                                               |             
|Real estate property, less accumulated depreciation of $13,907 |             
|and $12,190                                                    |             
|                                                               |             
|                                                               |             
|Other assets (Note 4)                                          |             
|                                                               |             
|                                                               |             
|                                                               |             
|                                                               |             
|TOTAL ASSETS                                                   |             
|                                                               |             

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

33

---

---



# AMPAL-AMERICAN ISRAEL
CORPORATION AND SUBSIDIARIES 
CONSOLIDATED BALANCE SHEETS

|                                                                        | Liabilities and Shareholders'
Equity As At
|----------------------------------------------------------------------- | ------------------------------------------
|
|
|
|
|LIABILITIES                                                             |                                           
|
|Notes and loans payable (Note 5)                                        |                                           
|Debentures                                                              |                                           
|Deposits from tenants                                                   |                                           
|Accounts payable, accrued expenses and others (Note 6)                  |                                           
|                                                                        |                                           
|Total liabilities                                                       |                                           
|                                                                        |                                           
|Commitments and Contingencies (note 15)                                 |                                           
|Minority interests, net                                                 |                                           
|                                                                        |                                           
|                                                                        |                                           
|                                                                        |                                           
|SHAREHOLDERS' EQUITY(Note 7)                                            |                                           
|
|4% Cumulative Convertible Preferred Stock, $5 par value; authorized     |                                           
|189,287 shares; issued 114,198 and 124,024 shares; outstanding          |                                           
|110,848 and 120,674 Shares                                              |                                           
|                                                                        |                                           
|6-1/2% Cumulative Convertible Preferred Stock, $5 par value; authorized |                                           
|988,055 shares; issued 641,423 and 662,219 shares; outstanding 518,887  |                                           
|and 539,683 shares                                                      |                                           
|                                                                        |                                           
|Class A Stock $1 par value; authorized 60,000,000 shares; issued        |                                           
|25,826,821 and 25,715,303 shares; outstanding 20,075,782 and 19,883,639 |                                           
|shares                                                                  |                                           
|                                                                        |                                           
|Additional paid-in capital                                              |                                           
|                                                                        |                                           
|Retained earnings                                                       |                                           
|                                                                        |                                           
|Accumulated other comprehensive loss                                    |                                           
|                                                                        |                                           
|Treasury stock, at cost                                                 |                                           
|                                                                        |                                           
|                                                                        |                                           
|                                                                        |                                           
|Total shareholders' equity                                              |                                           
|                                                                        |                                           
|                                                                        |                                           
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                              |                                           
|                                                                        |                                           

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

34

---

---



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

|                                                       | Fiscal Year Ended December 31,
|------------------------------------------------------ | ------------------------------
|
|
|
|
|Cash flows from operating activities:                  |                               
|Net (loss) income                                      |                               
|Adjustments to reconcile net (loss) income to net      |                               
|cash provided by operating activities:                 |                               
|Equity in earnings of affiliates                       |                               
|Realized and unrealized  net gains on                  |                               
|investments                                            |                               
|Loss (gain) on sale of real estate rental property     |                               
|Depreciation expense                                   |                               
|Amortization income  from tenants deposits             |                               
|Impairment of investments                              |                               
|Minority interests                                     |                               
|Translation (gain) loss                                |                               
|Decrease (Increase) in other assets                    |                               
|(Decrease) increase in accounts payable, accrued       |                               
|expenses and other                                     |                               
|Investments made in trading securities                 |                               
|Proceeds from sale of trading securities               |                               
|Dividends received from affiliates                     |                               
|                                                       |                               
|                                                       |                               
|Net cash  provided by (used in) operating activities . |                               
|                                                       |                               
|                                                       |                               
|Cash flows from investing activities:                  |                               
|Deposits, notes and loans receivable collected         |                               
|Deposits, notes and loans receivable granted           |                               
|Investments made in:                                   |                               
|Affiliates and others                                  |                               
|Proceeds from sale of investments:                     |                               
|Affiliate Company                                      |                               
|Others                                                 |                               
|Return of capital by partnership                       |                               
|Capital improvements                                   |                               
|Acquisition of minority interest                       |                               
|Proceeds from sale of real estate property, net        |                               
|                                                       |                               
|                                                       |                               
|Net cash provided by investing activities              |                               
|                                                       |                               

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

35

---

---



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

|                                                                 | Fiscal Year Ended December 31,
|---------------------------------------------------------------- | ------------------------------
|
|
|
|
|Cash flows from financing activities:                            |                               
|Notes and loans payable received                                 |                               
|Long term loan received by partnership                           |                               
|minority                                                         |                               
|Notes and loans payable repaid                                   |                               
|Proceeds from exercise of stock options                          |                               
|Debentures repaid                                                |                               
|(Distribution) contribution to partnership by minority interests |                               
|Dividends paid on preferred stock                                |                               
|                                                                 |                               
|                                                                 |                               
|Net cash used in financing activities                            |                               
|                                                                 |                               
|Effect of exchange rate changes on cash and                      |                               
|cash equivalents                                                 |                               
|                                                                 |                               
|Net increase in cash and cash equivalents                        |                               
|Cash and cash equivalents at beginning of year                   |                               
|                                                                 |                               
|                                                                 |                               
|Cash and cash equivalents at end of year                         |                               
|                                                                 |                               
|                                                                 |                               
|Supplemental Disclosure of Cash Flow Information                 |                               
|Cash paid during the year:                                       |                               
|Interest                                                         |                               
|                                                                 |                               
|                                                                 |                               
|Income taxes paid                                                |                               
|                                                                 |                               
|                                                                 |                               
|Proceeds on trading securities received from realization of an   |                               
|investment                                                       |                               
|                                                                 |                               
|                                                                 |                               
|Supplemental disclosure of non cash operating Activities:        |                               
|Dividend in kind from an affiliate                               |                               
|                                                                 |                               
|                                                                 |                               

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

36

---

---



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

|                                                      | Fiscal Year Ended December 31,
|----------------------------------------------------- | ------------------------------
|
|
|
|
|4% PREFERRED STOCK                                    |                               
|Balance, beginning of year                            |                               
|Conversion of 9,826, 7,928 and 7,439 shares           |                               
|into Class A Stock                                    |                               
|                                                      |                               
|Balance, end of year                                  |                               
|                                                      |                               
|                                                      |                               
|6-1/2% PREFERRED STOCK                                |                               
|Balance, beginning of year                            |                               
|Conversion of 20,796, 35,161 and 9,070 shares         |                               
|into Class A Stock                                    |                               
|                                                      |                               
|Balance, end of year                                  |                               
|                                                      |                               
|                                                      |                               
|CLASS A STOCK                                         |                               
|Balance, beginning of year                            |                               
|Issuance of shares upon conversion of                 |                               
|Preferred Stock                                       |                               
|                                                      |                               
|Balance, end of year                                  |                               
|                                                      |                               
|                                                      |                               
|ADDITIONAL PAID-IN CAPITAL                            |                               
|Balance, beginning of year                            |                               
|Conversion of Preferred Stock                         |                               
|                                                      |                               
|                                                      |                               
|Balance, end of year                                  |                               
|                                                      |                               
|                                                      |                               
|RETAINED EARNINGS                                     |                               
|Balance, beginning of year                            |                               
|Net (loss) income                                     |                               
|Loss from treasury stock reissued for exercised stock |                               
|option                                                |                               
|                                                      |                               
|Dividends:                                            |                               
|4% Preferred Stock - $0.20 per share                  |                               
|6-1/2% Preferred Stock - $0.325 per share             |                               
|                                                      |                               
|Balance, end of year                                  |                               
|                                                      |                               

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

37

---

---



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

|                                                                                 | Fiscal Year Ended December 31,
|-------------------------------------------------------------------------------- | ------------------------------
|
|
|
|
|TREASURY STOCK:                                                                  |                               
|                                                                                 |                               
|4% PREFERRED STOCK                                                               |                               
|Balance, beginning  and end of year                                              |                               
|                                                                                 |                               
|                                                                                 |                               
|6-1/2% PREFERRED STOCK                                                           |                               
|Balance, beginning and end of year                                               |                               
|                                                                                 |                               
|                                                                                 |                               
|CLASS A STOCK                                                                    |                               
|Balance, beginning of year - 5,831,664, 5,831,664 and  5,831,664 shares, at cost |                               
|                                                                                 |                               
|Issuance of 80,625 shares                                                        |                               
|                                                                                 |                               
|Balance, end of year - 5,751,039, 5,831, 664                                     |                               
|and 5,831,664 shares, at cost                                                    |                               
|                                                                                 |                               
|                                                                                 |                               
|Balance, end of year                                                             |                               
|                                                                                 |                               
|                                                                                 |                               
|ACCUMULATED OTHER COMPREHENSIVE                                                  |                               
|LOSS                                                                             |                               
|Cumulative translation adjustments:                                              |                               
|Balance, beginning of year                                                       |                               
|Foreign currency translation adjustments                                         |                               
|                                                                                 |                               
|Balance, end of year                                                             |                               
|                                                                                 |                               
|                                                                                 |                               
|Unrealized gains (losses) on available for sale                                  |                               
|securities:                                                                      |                               
|Balance, beginning of year                                                       |                               
|Unrealized (losses) gains, net                                                   |                               
|Sale of available-for-sale securities                                            |                               
|                                                                                 |                               
|Balance, end of year                                                             |                               
|                                                                                 |                               
|                                                                                 |                               
|Balance, end of year                                                             |                               
|                                                                                 |                               
|                                                                                 |                               
|Total Shareholders' equity                                                       |                               
|                                                                                 |                               

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

38

---

---



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

|                                               | Fiscal year ended December 31,
|---------------------------------------------- | ------------------------------
|
|
|
|
|Net (loss) Income                              |                               
|                                               |                               
|Other comprehensive (loss) income, net of tax: |                               
|Foreign currency translation adjustments       |                               
|Unrealized gain (loss) on securities           |                               
|Sale of available for sale securities          |                               
|                                               |                               
|Other comprehensive income (loss)              |                               
|                                               |                               
|                                               |                               
|Comprehensive (loss) income                    |                               
|                                               |                               

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

*  See note 1(m)

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

39

---

---



# 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 13.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | (4) | The
preparation of financial statements in conformity with generally accepted
          accounting principles requires management to make estimates and assumptions
that           affect the reported amounts of assets and liabilities, disclosure of
contingent           assets and liabilities at the date of the financial statements and
the reported           amounts of revenues and expenses during the reporting period.
Actual results           could differ from those estimates.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Consolidation
|--- | -------------

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

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

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

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

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

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

At
December 31, 2005, the Company did not have any open foreign currency forward exchange
contracts to purchase or sell US Dollars.

40

---

---



|(e) | Investments
|--- | -----------

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

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

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

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

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

Equity
investments of less than 20% in non-publicly traded companies are carried at cost. Changes
in the value of these investments are not recognized unless an impairment in value is
deemed to be other than temporary.

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

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

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

|(g) | Real
 Estate Property
|--- | ----------------------

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

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

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

41

---

---



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

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

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

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

Deferred
income taxes are not provided on undistributed earnings of foreign subsidiaries adjusted
for translation effect totaling approximately $29.5 million in 2004 and $0 in 2005, since
such earnings are currently expected to be permanently reinvested outside the United
States. If the earnings were not considered permanently invested, the Company would have
paid approximately $10.3 million in 2004 and $0 in 2005 in deferred income taxes.

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

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

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 dividend payments from Motorola are recorded in the statement of
income (loss) over the guaranteed period (see also note 2(b)). Revenue from amortization
of tenant deposits is calculated at a fixed periodic rate based on the specific terms in
the occupancy agreement signed with the tenants.

|(k) | Cash
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.

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

Basic
and diluted net earning (loss) per share are presented in accordance with SFAS No. 128
Earnings per share (SFAS No. 128), and as from 2004, but with
retroactive effect, with EITF 03-06 participating securities and the two-class
method under FAS 128", for all periods presented.In 2005 and 2004, all
outstanding stock options and preferred shares have been excluded from the calculation of
the diluted loss per share because all such securities are anti-dilutive for these periods
presented. Also, participating 4% Convertible Preferred Stock were not taken into account
in the computation of the basic EPS for those years since its shareholders do not have
contractual obligation to share in the losses of the Company. In 2003, the basic EPS was
computed using the two-class method. The implementation of EITF 03-06 to prior periods
resulted in immaterial change (less than $0.01) in the basic EPS for 2003. The total
number of common shares related to outstanding options and preferred shares excluded from
the calculations of diluted net loss per share was 2,024,500 and 2,064,500 for the years
ended December 31, 2005 and 2004, respectively. As to data used in the per share
computation see Note 9 .

42

---

---



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

SFAS
No. 130, Reporting Comprehensive Income, (SFAS No. 130)
established standards for the reporting and display of comprehensive income (loss), its
components and accumulated balances in a full set of general purpose financial statements.
The Companys components of other comprehensive income (loss) are net income
(losses), income (loss) from selling available for sale investments, net unrealized gains
or losses on investments held as available for sale and foreign currency translation
adjustments, which are presented net of income taxes. Comprehensive income in the
consolidated statements of comprehensive income (loss) in the years 2004 and 2003 does not
include amounts for realized gain on available for sale securities, as the amounts are not
material.

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

The
Company accounts for all employee stock options plans under APB Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations.
Accordingly, the compensation cost relating to stock options is charged on the date of
grant of such options, to shareholders equity, under deferred compensation, and it
thereafter amortized by the straight  line method and charged against income over
vesting period. No compensation costs were incurred in the years ended December 31, 2005,
2004 and 2003, because the exercise price on the date of grant equals fair value of the
stock.

SFAS
No. 123 Accounting for Stock-Based Compensation (SFAS No. 123) as
amended by SFAS 148 established a fair value-based method of accounting for employee stock
options or similar equity instruments and encourages adoption of such method for stock
compensation plans. However, it also allows companies to continue to account for those
plans using the accounting treatment prescribed by APB No. 25. The Company has elected to
continue accounting for employee stock option plans according to APB No. 25 and
accordingly discloses pro forma data assuming the Company had accounted for employee stock
option grants using the fair value based method as defined in SFAS No. 123.

If
compensation cost for the options under the plans in effect been determined in accordance
with SFAS No. 123, the Companys net income (loss) and EPS would have been reduced as
follows:

|                            |  | Fiscal Year Ended December 31,
|--------------------------- |  | ------------------------------
|
|
|
|
|Basic EPS:                  |  |                               
|                            |  |                               
|Net (loss) income:          |  |                               
|                            |  |                               
|Less - stock based          |  |                               
|compensation expense        |  |                               
|Determined under fair value |  |                               
|method                      |  |                               
|                            |  |                               
|                            |  |                               
|                            |  |                               
|                            |  |                               
|                            |  |                               
|                            |  |                               
|                            |  |                               
|                            |  |                               

43

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|             |  | Fiscal Year Ended December 31,
|------------ |  | ------------------------------
|
|
|
|
|Diluted EPS: |  |                               
|             |  |                               
|             |  |                               
|             |  |                               

| | (1)After
deduction of accrued Preferred Stock Dividend (in thousands) of $191 and $200 and $213,
for the years 2005, 2004 and 2003, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------

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
2005, 2004 and 2003, respectively: (1) expected life of options of 5 years; (2) dividend
yield of 0%; (3) volatility ranging from 46% to 60%; and (4) risk-free interest rate
ranging from 3.3% to 4.08%.

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

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

|(p) | Recently
Issued AccountingPronouncements
|--- | ----------------------------------------

# For 123R (Revised
2004) Share Based Payment

In
December 2004, the Financial Accounting Standards Board (FASB) issued the
revised Statement of Financial Accounting Standards (FAS) No. 123, Share-Based
Payment (FAS 123R), which addresses the accounting for share-based payment transactions in
which the Company obtains employee services in exchange for (a) equity instruments of the
Company or (b) liabilities that are based on the fair value of the Companys equity
instruments or that may be settled by the issuance of such equity instruments. In March
2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SECs
interpretation of FAS 123R.

FAS
123R eliminates the ability to account for employee share-based payment transactions using
APB Opinion No. 25  Accounting for Stock Issued to Employees, and
requires instead that such transactions be accounted for using the grant-date fair value
based method. This Statement will be effective as of the beginning of thefirst
interim period after June 15, 2005 (January 1, 2006 for the Company). Early adoption of
FAS 123R is encouraged. This Statement applies to all awards granted or modified after the
Statements effective date. In addition, compensation cost for the unvested portion
of previously granted awards that remain outstanding on the Statements effective
date shall be recognized on or after the effective date, as the related services are
rendered, based on the awards grant date fair value as previously calculated for the
pro-forma disclosure under FAS 123.

The
Company estimates that the cumulative effect of adopting FAS 123R, as of its adoption date
by the Company (January 1, 2006), based on the awards outstanding as of December 31, 2005,
will not be material. This estimate does not include the impact of additional awards,
which may be granted, or forfeitures, which may occur subsequent to December 31, 2005 and
prior to the adoption of FAS 123R.

The
Company expects that upon the adoption of FAS 123R, the Company will apply the modified
prospective application transition method, as permitted by the Statement. Under such
transition method, upon the adoption of FAS 123R, the Companys financial statements
for periods prior to the effective date of the Statement will not be restated.

44

---

---



The
Company expects, based on the awards outstanding as of December 31, 2005, that this
statement will have an estimated effect of $0.8 million on its financial position and
results of operations in 2006.

# FAS 154
- No  accounting  Changes  and  Error  Corrections  - a  replacement  of APB  Opinion  No.  20 and FASB Statement No. 3

In
June 2005, the Financial Accounting Standards Board issued FAS No. 154,Accounting
Changes and Error Corrections  a replacement of APB Opinion No. 20 and FASB
Statement No.3". This Statement generally requires retrospective application to prior
periods financial statements of changes in accounting principle. Previously, Opinion
No. 20 required that most voluntary changes in accounting principle were recognized by
including the cumulative effect of changing to the new accounting principle in net income
of the period of the change. FAS 154 applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement in the
unusual instance that the pronouncement does not include specific transition provisions.
When a pronouncement includes specific transition provisions, those provisions should be
followed. This Statement shall be effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005 (Year 2006 for the Company).
We do not expect the adoption of this statement will have a material impact on our results
of operations, financial position or cash flow.

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

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

|Note 2 |  | Acquisitions,
Dispositions and Impairments
|------ | - | ------------------------------------------

|(a) | In
2005, the Company made the following investments:
|--- | ----------------------------------------------------

| | 1. | On
December 1, 2005 the Company acquired a 2% interest in EMG from Merhav. EMG           is
an Egyptian joint stock company organized in accordance with the Egyptian
          Special Free Zones system which has been given the right to export natural gas
          from Egypt to Israel and other locations in the East Mediterranean basin and
          other countries. Egyptian natural gas shall reach the Israeli market via an
          underwater pipeline owned by EMG. Under the terms of the transaction, the
          Company acquired a 2% beneficial ownership in EMG for a purchase price of
          $29,960,000. Additionally, the Company was granted the exclusive right to
          negotiate to acquire a substantial portion of Merhavs remaining shares of
          EMG. The Company also has the right for a period of time to require Merhav to
          repurchase the EMG interest.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Yosef
A. Maiman, the chairman of the Companys Board of Directors and the Companys
controlling shareholder, is the sole owner of Merhav. The transaction was approved by a
special committee of the Board of Directors composed of the Companys independent
directors. Houlihan Lokey Howard & Zukin Financial Advisors, Inc. acted as financial
advisors to the special committee.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Additional
investment of $0.7 million in Fimi Opportunity Fund, L.P.           (Fimi).
| | -- | ----------------------------------------------------------------------------------------

| | 3. | A
loan to Bay Heart Ltd. of $0.9 million, a shopping mall.
| | -- | ----------------------------------------------------------

45

---

---



|(b) | In
2005, the Company made the following dispositions:
|--- | -----------------------------------------------------

| | 1. | During
the third and fourth quarter of 2005, one of the holdings of           Ampals
investee companies, TP received proceeds at the amount of $1.1           million from
selling all its assets in Grapes Communications N.V./S.A. and its           holdings in
PSINet Europe B.V.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | On
October 3, 2005 the Company, through Ampal Communications L.P., completed           the
sale to Motorola Israel Ltd. of all of its 25% holdings of MIRS pursuant to           the
Agreement. In connection with the sale of its holdings of MIRS, Ampal
          Communications L.P. received approximately US $89 million of total proceeds,
          composed of US $67.7 million for the purchase price and an additional US $21.3
          million related to guaranteed dividend payments. During the third quarter of
          2005, the Company recorded a $13.3 million loss from impairment relating to
this           investment.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | On
September 7, 2005 a third-party Israeli based venture fund and certain of           its
affiliated companies invested $2.65 million in the Companys high-tech           and
communications portfolio. Ampal received $2.5 million in connection with           this
transaction. The Company treated this investment as a disposition for
          accounting purposes and recorded a loss of $7.3 million ($4.6 million after
          taxes).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | On
August 15, 2005 the Company sold its holdings in Epsilon Investment House           Ltd.
and Renaissance Investment Company Ltd. for $2.0 million and recorded a           $1.4
million gain.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | On
July 11, 2005, the Company sold its holdings in Xpert Ltd. for $0.8 million           and
recorded a loss of $0.2 million.
| | -- | -----------------------------------------------------------------------------------------------------------------------------

| | 6. | On
March 8, 2005, the Company sold its holdings in Modem Art Ltd. for $4.4           million
and recorded a gain of $3.3 million.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------

|(c) | In 2005, the Company recorded loss from impairment of investments and loan of
               $14.0 million as follows:
|--- | ----------------------------------------------------------------------------------------------------------------------

| | 1. | MIRS
Ltd. ($13.3 million)
| | -- | -------------------------

| | 2. | Shiron
Ltd. ($0.6 million)
| | -- | --------------------------

| | 3. | Other
loans ($0.1           million)
| | -- | ------------------------------------

|(d) | In
2004, the Company made investments aggregating $6.3 million, as           follows:
|--- | -------------------------------------------------------------------------------------

| | 1. | The
Company invested EUR 4.9 million (approximately US$5.8 million) in           Telecom
Partners Limited Partnership, a newly formed entity that           will serve as a
platform for investments in the telecommunication industry           predominantly
outside of Israel. Ampal holds 33.3% of TP which currently holds           investments in
two European telecom service providers: PSINet Europe B.V.           (PSInet)
and Grapes Communications N.V./S.A.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | A
loan of $0.2 million to ShellCase, the principal business of which is the
          packaging process of semiconductor chips.
| | -- | -------------------------------------------------------------------------------------------------------------------------------

| | 3. | An
investment of $0.3 million in Fimi Opportunity Fund, L.P. (Fimi).
| | -- | --------------------------------------------------------------------

|(e) | In
2004, the Company made the following dispositions:
|--- | -----------------------------------------------------

| | 1. | On
February 19, 2004, Ampal sold its holdings in XACCT Technology Ltd. for $3.8
          million.
| | -- | --------------------------------------------------------------------------------------------------

46

---

---



| | 2. | During
May 2004, the Company sold 49% of its holdings in PowerDSine Ltd. for
          approximately $7.4 million.
| | -- | ------------------------------------------------------------------------------------------------------------------

| | 3. | During
the third quarter of 2004, PSInet, one of the holdings of Ampals           investee
company, TP, sold all its assets to large telecommunications providers.
          Following the sale, a portion of the proceeds was distributed to TP, of which
          Ampal received $7.1 million and recorded a gain of $2.5 million in connection
          with this transaction. The remaining carrying value is $1.2 million.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(f) | In
2004, the Company recorded loss from impairment of investments of $38.8           million
as follows:
|--- | --------------------------------------------------------------------------------------------------------

| | 1. | MIRS
Ltd. ($30 million)*
| | -- | ------------------------

| | 2. | Star
Management of Investment ($1.6 million)
| | -- | --------------------------------------------

| | 3. | Courses
Investment in Technology Ltd. ($0.3 million)
| | -- | ----------------------------------------------------

| | 4. | VisionCare
Opthalmic Technologies ($0.5 million investment)
| | -- | -----------------------------------------------------------

| | 5. | ShellCase
Ltd. ($3.8 million)
| | -- | -----------------------------

| | 6. | Identify
Solutons Ltd. ($0.7 million)
| | -- | -------------------------------------

| | 7. | Xpert
Integrated Systems Ltd. ($1.7 million)
| | -- | --------------------------------------------

| | 8. | Peptor
Ltd. ($0.2 million).
| | -- | ---------------------------

| | *
Management determined that a reduction in the carrying value of MIRS by $30 million is
appropriate at the time due to the then existing relationship with Motorola.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 1. | An
additional investment of $0.9 million in ShellCase Ltd. The company holds an
          approximate 13.84% equity interest in ShellCase Ltd.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | An
additional investment of $0.3 million in Star Management of Investment No.           II
(2000) L.P., a venture capital fund which focuses on investment in
          communication, Internet, software and medical devices.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | An
investment of $0.2 million in Fimi Opportunity Fund, L.P.
| | -- | ------------------------------------------------------------

| | 4. | A
loan of $0.1 million to Shiron Ltd., a developer and manufacturer of two-way
          satellite communications products.
| | -- | ---------------------------------------------------------------------------------------------------------------------------

| | 5. | A
loan to Netformx Ltd. of $0.2 million, a developer of network design tools.
| | -- | -----------------------------------------------------------------------------

| | 6. | A
loan to Bay Heart Ltd. of $0.1 million, a shopping mall.
| | -- | ----------------------------------------------------------

|(h) | During 2003, the Company, which previously held a 20.4% interest in Granite,
               sold 9.9% of its holding for $19.5 million. Consequently, the Companys
               investment in Granite, which was previously accounted for by the equity method,
               was accounted for as an investment in trading marketable securities. (The
               remaining holding in Granite was sold in 2004).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

47

---

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|(i) | In
2003, the Company recorded loss from impairment of investments of $13.1           million
as follows:
|--- | --------------------------------------------------------------------------------------------------------

| | 1. | XACCT
Technologies Ltd. (XACCT) ($9.0 million investment).
| | -- | ------------------------------------------------------------

| | 2. | Carmel
Container Ltd. ($2.0 million).
| | -- | -------------------------------------

| | 3. | Identify
Solution Ltd. ($1.3 million investment).
| | -- | -------------------------------------------------

| | 4. | Cute
Ltd. ($0.2 million loan).
| | -- | ------------------------------

| | 5. | Real
estate in Migdal Haemek ($0.6 million).
| | -- | --------------------------------------------

|Note 3 |  | 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, 2005 and 2004 are as follows:
| | ----------------------------------------------------------------------------------------------

|     | Cost | Unrealized
Gains | Market
Value
|---- | ---- | ---------------- | ------------
|
|
|
|
|2005 |      |                  | $           
|     |      |                  |             
|     |      |                 
|2004 |      |                  | $           
|     |      |                  |             

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

| | The
cost and market values of available-for-sale securities consisting of marketable
securities only at December 31, 2005 and 2004 are as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------

|     | Cost | Unrealized
Gains | Market
Value
|---- | ---- | ---------------- | ------------
|
|
|
|
|2005 |      |                  | $           
|     |      |                  |             
|     |      |                 
|2004 |      |                  | $           
|     |      |                  |             

48

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|Note 4 |  | Other
Assets
|------ | - | ------------

The
balance of Other Assets as of December 31, 2005 and 2004, is composed of the
following items:

|                         | As of December 31,
|------------------------ | ------------------
|
|
|
|
|Deferred tax assets      |                   
|                         |                   
|Income receivables       |                   
|                         |                   
|Account receivable-trade |                   
|                         |                   
|Deferred expenses        |                   
|                         |                   
|Leasehold improvements   |                   
|                         |                   
|Others                   |                   
|                         |                   
|                         |                   
|                         |                   
|                         |                   

|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 Israel Shekels with interest rates
varying depending upon their linkage provision and mature between 2006 and 2010.

The
Company financed a portion of the $9.8 million real estate acquisition by Am-Hal, a
wholly-owned subsidiary of the Company, which develops and operates luxury retirement
centers for senior citizens, through a revolving credit facility from Hapoalim, Phoenix
Insurance Company and others. On December 1, 2005, a loan agreement creating the facility
was signed between Am-Hal, Phoenix Insurance Company and others. Pursuant to the loan
agreement, the lenders granted the Company a revolving credit facility in Israeli Shekels
equal to $12.5 million. The annual interest rate on the loan, which matures in 10 years,
is 7.5%. The interest rate and the principal of the loan will be adjusted based on the
changes in the Israeli Consumer Price Index. As of December 31, 2005 the Company had drawn
$2.5 million from the facility. As of December 31, 2005 and December 31, 2004 the amounts
outstanding under these loans were $13.5 million and $7.7 million, respectively. The loans
excluding the Phoenix loan, mature in up to one year and have interest rates range between
5.4% and 7.5%. The Company generally repays these loans with the proceeds received from
deposits and other payments from the apartments in Am-Hal facilities. The loans are
secured by a lien on Am-Hals properties and bank accounts. The Company also issued
guarantees in the amount of $3.6 million in favor of tenants of Am-Hal in order to secure
their deposits

The
Company also finances its general operations and other financial commitments through bank
loans with Hapoalim. The long-term loans in the amount of $31.3 million mature through
2006-2010.

Other
long term borrowings in the amount of $1.9 million are linked to the Israeli C.P.I and
mature between 2006 and 2010, of which an amount of $1.4 million bears no interest. The
remaining $0.5 million bears an annual interest of 5.7%.

49

---

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The
weighted average interest rates on the balances of short-term borrowings at year-end are
as follows: 6.0% on $15.0 million and 3.5% on $13.0 million in 2005 and 2004,
respectively.

Payments due by period:

|                 | (US. Dollars in thousands)
|---------------- | --------------------------
|
|
|
|
|Long-Term Debt   |                           
|
|Short--Term Debt |                           

|Note 6 |  | Accounts
payable accrued expenses and others
|------ | - | --------------------------------------------

|(a) | Composition:
|--- | ------------

|                                                | As of December 31,
|----------------------------------------------- | ------------------
|
|
|
|
|Deferred tax liabilities                        |                   
|
|Deferred income and accrued expenses            |                   
|
|Excess of share in losses of affiliate over the |                   
|investment                                      |                   
|
|Related party                                   |                   
|
|Deferred expenses from warrants*                |                   
|
|Others                                          |                   
|                                                |                   
|
|                                                |                   
|                                                |                   

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

50

---

---



|(b) | Accrued
severance liabilities
|--- | -----------------------------

| | Israeli
labor laws and agreements require payment of severance pay upon dismissal of an employee
or upon termination of employment in certain other circumstances. Ampal severance pay
liability in Israel, which reflects the undiscounted amount of the liability as if it was
payable at each balance sheet date, is calculated based upon length of service and the
latest monthly salary (one months salary for each year worked).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys liability for severance pay pursuant to Israeli law is partly covered by
insurance policies. The accrued severance pay liability of $ 0.8 million, net of deposits
made to insurance policies of $ 0.5 million, is included in accounts payable, accrued
expenses and other liabilities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
pay net increase (decrease) was approximately ($37,800), $21,000, and $134,000 in 2005,
2004, and 2003, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------

| | The
Company expects that the payments relating to future benefits to its employees upon their
retirement at normal retirement age in the next 10 years will be immaterial. These
payments are determined based on recent salary rates and do not include amounts that
might be paid to employees that will cease working with the Company, before their normal
retirement age or amount paid to employees that their normal retirement age extends
beyond the year 2015.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Note 7 |  | Shareholders Equity
|------ | - | --------------------

Capital Stock

The
4% and 6-1/2% preferred shares are convertible into five and three shares of Class A
Stock, respectively. At December 31, 2005, a total of 2,375,500 shares of Class A Stock
are reserved for issuance upon the conversion of the Preferred Stock and the exercise of
2,024,500 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, 2005, there are no dividends in arrears.

|Note 8 |  | 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, 2005, 30,000 options of the 1998 Plan
are fully vested and outstanding.

51

---

---



On
February 15, 2000, the Stock Option Committee approved a new Incentive Plan (2000
Plan), under which the Company has reserved 4 million shares of Class A Stock,
permitting the granting of options to all employees, officers and directors. The 2000 Plan
was approved by the Board of Directors of Ampal (the Board) at the meeting
held on March 27, 2000 and was approved by a majority of the Companys shareholders
at the June 29, 2000 annual meeting of shareholders. The plan remains in effect for a
period of ten years. As of December 31, 2005, 1,994,500 options under 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 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 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, the 329,000 outstanding options granted under the
Plans were immediately exercisable.

As of December 31, 2005, 2,375,500
options under both Plans are available for future grant.

Transactions under both Plans were as
follows:

The options granted under the plans
vest in equal installment every three months, except that a portion of the options may
vest on an accelerate basis upon the achievement of certain performance criteria.

|                                                          | Fiscal Year Ended
December 31, 2005
|--------------------------------------------------------- | -----------------------------------
|
|
|
|
|Outstanding at beginning of year                          |                                    
|Granted at market price                                   |                                    
|Forfeited/Expired                                         |                                    
|                                                          |                                    
|Outstanding at end of year                                |                                    
|                                                          |                                    
|                                                          |                                    
|Exercisable at end of year                                |                                    
|                                                          |                                    
|                                                          |                                    
|Weighted average grant date fair value of options granted |                                    
|                                                          |                                    
|                                                          |                                    
|Weighted average remaining contractual life               |                                    
|                                                          |                                    

52

---

---



|                                                          | Fiscal Year Ended
December 31, 2004
|--------------------------------------------------------- | -----------------------------------
|
|
|
|
|Outstanding at beginning of year                          |                                    
|Granted at market price                                   |                                    
|Forfeited/Expired                                         |                                    
|                                                          |                                    
|Outstanding at end of year                                |                                    
|                                                          |                                    
|                                                          |                                    
|Exercisable at end of year                                |                                    
|                                                          |                                    
|                                                          |                                    
|Weighted average grant date fair value of options granted |                                    
|                                                          |                                    
|                                                          |                                    
|Weighted average remaining contractual life               |                                    
|                                                          |                                    

|                                                          | Fiscal Year Ended
December 31, 2003
|--------------------------------------------------------- | -----------------------------------
|
|
|
|
|Outstanding at beginning of year                          |                                    
|Granted at market price                                   |                                    
|Forfeited/Expired                                         |                                    
|                                                          |                                    
|Outstanding at end of year                                |                                    
|                                                          |                                    
|                                                          |                                    
|Exercisable at end of year                                |                                    
|                                                          |                                    
|                                                          |                                    
|Weighted average grant date fair value of options granted |                                    
|                                                          |                                    
|                                                          |                                    
|Weighted average remaining contractual life               |                                    
|                                                          |                                    

53

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---



|Note 9 |  | Earnings
(Loss) Per Class A Share
|------ | - | ---------------------------------

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

|                                         | Fiscal Year Ended December 31, 2005
|---------------------------------------- | -----------------------------------
|
|
|
|
|Basic and diluted EPS(2)                 |                                    
|Net (loss) attributable to Class A Stock |                                    
|                                         |                                    

|                                         | Fiscal Year Ended December 31, 2004
|---------------------------------------- | -----------------------------------
|
|
|
|
|Basic and diluted EPS(2)                 |                                    
|Net (loss) attributable to Class A Stock |                                    
|                                         |                                    

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

|(1) | After
deduction of Preferred Stock dividends (in thousands) of $191, $200 and           $213 in
2005, 2004 and 2003, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(2) | Options
to purchase 2,024,500 and 2,064,500 shares of common stock were
               outstanding as of December 31, 2005 and 2004, respectively, and they were
not                included in the computation of diluted EPS because of their
anti-dilutive                effect.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | After
allocation of net income to the participating 4% Cumulative Convertible
          Preferred Stock.
|--- | --------------------------------------------------------------------------------------------------------

54

---

---



|Note 10 |  | Income
Taxes
|------- | - | ------------

|                                                  | Fiscal Year Ended December 31,
|------------------------------------------------- | ------------------------------
|
|
|
|
|The components of current and deferred income tax |                               
|expense (benefit) are:                            |                               
|Current:                                          |                               
|Federal                                           |                               
|Foreign                                           |                               
|
|Deferred:                                         |                               
|State and local                                   |                               
|Federal                                           |                               
|Foreign                                           |                               
|                                                  |                               
|Total                                             |                               
|                                                  |                               
|                                                  |                               
|                                                  |                               
|The domestic and foreign components of            |                               
|income (loss) before income                       |                               
|taxes are:                                        |                               
|                                                  |                               
|Domestic                                          |                               
|Foreign                                           |                               
|                                                  |                               
|Total                                             |                               
|                                                  |                               
|                                                  |                               
|A reconciliation of income taxes between the      |                               
|statutory and effective tax is as follows:        |                               
|                                                  |                               
|Federal income tax (benefit) at 34%               |                               
|Taxes on foreign loss below U.S. rate             |                               
|Changes in valuation allowance                    |                               
|Other                                             |                               
|                                                  |                               
|Total effective tax: 22%, 31%,and 4%              |                               
|                                                  |                               
|                                                  |                               

|                                                             | As of December 31,
|------------------------------------------------------------ | ------------------
|
|
|
|
|Deferred tax assets:                                         |                   
|The components of deferred tax assets and liabilities are as |                   
|follows:                                                     |                   
|Net operating loss and capital loss carryforwards            |                   
|Unrealized losses on investments                             |                   
|Foreign tax credits carryforwards                            |                   
|                                                             |                   
|Total deferred assets                                        |                   
|Valuation allowance                                          |                   
|                                                             |                   
|Net deferred tax assets                                      |                   
|                                                             |                   
|                                                             |                   
|Deferred tax liabilities:                                    |                   
|Tax on equity in earnings of affiliates                      |                   
|Cost basis of investment greater than tax bases              |                   
|Other                                                        |                   
|                                                             |                   
|Total deferred tax liability                                 |                   
|                                                             |                   
|                                                             |                   
|Net deferred tax assets                                      |                   
|                                                             |                   

55

---

---



As
of December 31, 2005, valuation allowance is provided against tax benefits on foreign net
operating loss carryforwards of $26.8 million.

As
of December 31, 2005, the Company has foreign tax credits of $5.5 million that will expire
in the years 2009 through 2014.

As
of December 31, 2005, the Company has U.S. Federal net operating loss carryforwards of
approximately $29.5 million that will expire in the years 2021 through 2024. The
utilization of net operating loss carryforwards may be subject to substantial annual
limitations if there has been a significant change in ownership. Such a
change in ownership, as described in Section 382 of the Internal Revenue Code,
may substantially limit the Companys utilization of the net operating loss
carryforwards.

|Note 11 |  | Investments
in Affiliates
|------- | - | -------------------------

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

|                                         | As of December 31,
|---------------------------------------- | ------------------
|
|
|
|
|Bay Heart Limited                        |                   
|Carmel Containers Systems Limited        |                   
|Coral World International Limited        |                   
|CUTe Ltd.                                |                   
|Epsilon Investment House Ltd.            |                   
|Hod Hasharon Sport Center (1992) Limited |                   
|Partnership                              |                   
|Ophir Holdings                           |                   
|Ophirtech Ltd.                           |                   
|Renaissance Investment Company Ltd.      |                   
|Trinet Investment in High-Tech Ltd.      |                   
|Trinet Venture Capital Ltd.              |                   

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

|             | Fiscal Year Ended December 31,
|------------ | ------------------------------
|
|
|
|
|Revenues     |                               
|Gross profit |                               
|Net income   |                               

|                                             | As of December 31,
|-------------------------------------------- | ------------------
|
|
|
|
|Property and equipment                       |                   
|Other assets                                 |                   
|                                             |                   
|Total assets                                 |                   
|                                             |                   
|                                             |                   
|Total liabilities, including bank borrowings |                   
|                                             |                   

56

---

---



|Note 12 |  | Other
Income.
|------- | - | -------------

Other
revenues for each of the years ended December 31, 2005, and 2004 include accrual of
guaranteed dividend payments from Motorola relating to the investment in MIRS of $ 7.1
million and $2.2 million from member subscription in the Country Club for 2005 (2004
 $2.2 million).

|Note 13 |  | Operating
Segments Information
|------- | - | ------------------------------

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

|                                           | Fiscal Year Ended December 31,
|------------------------------------------ | ------------------------------
|
|
|
|
|Revenues:                                  |                               
|Finance                                    |                               
|Real estate income                         |                               
|Leisure-time                               |                               
|Intercompany adjustments                   |                               
|                                           |                               
|                                           |                               
|Equity in earning of affiliates            |                               
|                                           |                               
|Total                                      |                               
|                                           |                               
|                                           |                               
|Equity in Earnings (losses) of Affiliates: |                               
|Finance                                    |                               
|Real estate rental                         |                               
|Leisure-time                               |                               
|Others                                     |                               
|                                           |                               
|Total                                      |                               
|                                           |                               
|                                           |                               
|Interest Income:                           |                               
|Finance                                    |                               
|Intercompany adjustments                   |                               
|                                           |                               
|Total                                      |                               
|                                           |                               
|                                           |                               
|Interest Expense:                          |                               
|Finance                                    |                               
|Real estate rental                         |                               
|Leisure-time                               |                               
|Intercompany adjustments                   |                               
|                                           |                               
|Total                                      |                               
|                                           |                               
|                                           |                               
|Pretax Operating (Loss) Income:            |                               
|Finance                                    |                               
|Real estate rental                         |                               
|Leisure-time                               |                               
|                                           |                               
|                                           |                               
|Equity in earning of affiliates            |                               
|                                           |                               
|Total                                      |                               
|                                           |                               
|                                           |                               
|Income (Benefit) Tax Expense:              |                               
|Finance                                    |                               
|Real estate rental                         |                               
|Leisure-time                               |                               
|                                           |                               
|Total                                      |                               
|                                           |                               
|                                           |                               
|Net Income:                                |                               
|Finance                                    |                               
|Real estate rental                         |                               
|Leisure-time                               |                               
|Others                                     |                               
|                                           |                               
|                                           |                               
|Minority interest, net                     |                               
|                                           |                               
|Total                                      |                               
|                                           |                               
|                                           |                               
|Total Assets for year end:                 |                               
|Finance                                    |                               
|Real estate rental                         |                               
|Leisure-time                               |                               
|Intercompany adjustments                   |                               
|                                           |                               
|Total                                      |                               
|                                           |                               
|                                           |                               
|Investments in Affiliates for year end:    |                               
|Finance                                    |                               
|Real estate rental                         |                               
|Leisure-time                               |                               
|                                           |                               
|Total                                      |                               
|                                           |                               
|                                           |                               
|Capital Expenditures:                      |                               
|Finance                                    |                               
|Real estate rental                         |                               
|Leisure-time                               |                               
|                                           |                               
|Total                                      |                               
|                                           |                               
|                                           |                               
|Depreciation, Amortization and Impairment: |                               
|Finance                                    |                               
|Real estate rental                         |                               
|Leisure-time                               |                               
|                                           |                               
|Total                                      |                               
|                                           |                               
|                                           |                               

57

---

---



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.

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

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

58

---

---



|Note 14 |  | Disclosures
about Fair Value of Financial Instruments
|------- | - | -----------------------------------------------------

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

|(a) | Cash
and Cash Equivalents
|--- | -------------------------

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

|(b) | Deposits,
Notes and Loans Receivable
|--- | ------------------------------------

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

|(c) | Investments
|--- | -----------

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

|(d) | Financial
Instruments
|--- | ---------------------

The
fair value of the financial instruments included in other assets, accounts payable, and
accrued expenses presented at a fair value.

|(e) | Commitments
|--- | -----------

Due
to the relatively short term of commitments discussed in Note 15, the contract value is
considered to be at fair value.

|(f) | Financial
Assets and Financial Liabilities
|--- | ------------------------------------------

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

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

59

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|Note 15 |  | Commitments
and Contingencies
|------- | - | -----------------------------

| | (a) | The
combined minimum annual lease payments on Ampals corporate office and           its
subsidiary Country Club Kfar Saba Ltd. in 2005 were $ 0.3 million.
          The lease of the corporate offices expires in 2009 and the Kfar Saba lease
          expires in 2038. In the years 2006-2010, the combined annual lease payments on
          those premises will be in an aggregate amount of $ 1.4 million, and
          thereafter, an amount totaling $4.9 million.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | AM-Hal
provided a lien to Bank Hapoalim on AM-Hal properties in Rishon           Le Zion
and Hod Hasharon to guarantee a loan of $10.4 million.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | The
Company has issued guarantees on bank loans to its investees and           subsidiaries
totaling $10.3 million as follows:
| | --- | ------------------------------------------------------------------------------------------------------------------------------

| | (1) | The
Company provided a $3.6 million guarantee to AMHal tenants.
| | --- | ----------------------------------------------------------------

| | (2) | The
Company provided a $5.8 million guarantee on indebtedness incurred by Bay
          Heart.
| | --- | ----------------------------------------------------------------------------------------------

| | (3) | The
Company provided a $0.9 million guarantee to Galha (1960) Ltd, for the           payment
of the Companys subsidiary of a final judgment, if entered against           the
Companys subsidiary. (See below)
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | (e) | Legal
Proceedings:
| | --- | ------------------

| | Ampal
Communications L.P.
| | -------------------------

| | 1.        On
May 10, 2004, Ampal Communications L.P., a limited partnership           controlled
by Ampal and in which Ampal holds a 75% equity interest, filed a           claim in the
Tel-Aviv District Court against Motorola Communications Israel           Ltd., Motorola
Israel Ltd., Elisha Yanai, Peter Brum, Rami Guzman, Nathan           Gidron, Shimon Tal
and MIRS Communications Ltd. (collectively, the           Defendants), for
injunctive and declaratory relief as described           below. The claim is in
connection with the exploitation by the defendants of           Ampal Communications minority
rights by virtue of its 33% holding in MIRS           Communications Ltd.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Ampal
Communications L.P. requested the Court to issue relief as follows:
| | -------------------------------------------------------------------------

| | A. | Declaring
that the business of MIRS Communications Ltd. is conducted in such a           way as to
be prejudicial to the rights of Ampal Communications L.P. as a           minority share
holder;
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Appointing
an appraiser to conduct a valuation of MIRS Communications Ltd. and           Ampal
Communications L.P.s holdings therein, which will encompass a review           of
the way MIRS Communications Ltd. conducts its business, including a review of
          the related party transactions between MIRS Communications Ltd. and Motorola
          Israel Ltd. and/or any other of the Defendants;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Instructing
each of the Defendants to acquire and purchase from Ampal           Communications L.P.
the shares it holds in MIRS Communications Ltd. at the           highest of the following
prices:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (1) | based
on a company valuation of MIRS Communications Ltd. as presented to Ampal
          Communications L.P. by Motorola prior to the signing of the Share Purchase
          Agreement for MIRS Communications Ltd.; or
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

60

---

---



| | (2) | based
on the amount paid by Ampal Communications L.P. for its share holding in           MIRS
Communications Ltd. plus linkage to the Israeli consumer index and           interest; or
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | based
on the company valuation that will be determined by the valuation           specified in
Section B above, excluding any material negative effect           brought about by
the Defendants omissions and/or negligence in their           management of MIRS
Communications Ltd., all as may be assessed and computed by           the appraiser
specified in Section B above;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Determining
that each of the individual Defendants, as officers in MIRS           Communications
Ltd., has violated his respective fiduciary obligations towards           Ampal
Communications L.P. as a minority shareholder in MIRS Communications Ltd.;           and
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Declaring
that the Share Purchase Agreement pursuant to which Ampal           Communications L.P.
acquired its shareholding in MIRS Communications Ltd. and           the Shareholders
Agreement in respect thereof, are void.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | On
May 24, 2004 and on May 31, 2004 the Defendants requested the district court           to
strike out the claim in limine, on the grounds that Ampal had allegedly not
          paid sufficient fees when filing the claim, and further requested an extension
          of the time for filing statements of defense until after the district court had
          reached a decision regarding the request to strike out the claim. Ampal and the
          Defendants filed various responses and on June 30, 2004, the district court
          requested the Attorney General to furnish an opinion regarding the
          Defendants request before issuing its own decision. On October 11, 2004
          the Attorney General furnished its opinion that supported the Defendants          request
that Ampal should pay the fees calculated on the basis of the value of           the
requested remedies in the claim.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
November 10, 2004 Ampal filed its response. The Court also decided that the statements of
defense should be filed 10 days after it issues its decision regarding the striking out
of the claim.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | On
March 1, 2005, Ampal requested the district court to enter judgment against
          Peter Brum on the grounds that he failed to file a defense to the Companys
          claim. On March 15, 2005, the district court granted Ampals request and
          entered judgment against Peter Brum. On March 17, 2005, the district court
          ordered Mr. Brum to acquire and purchase from Ampal the shares it holds in MIRS
          for a total company valuation of $ 765,998,000, which is the highest of the
          prices set forth in the complaint. The litigation with regard to the other
          defendants is ongoing. Peter Brum, Motorola and MIRS have appealed the district
          courts judgment on numerous grounds. Ampal has filed responses to the
          appeal.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | On
August 30, 2005, the Company, through Ampal Communications L.P. entered into           a
Stock Purchase and Indemnification Agreement, dated as of August 30, 2005, by
          and among Motorola Israel Ltd., Ampal Communications L.P. and MIRS (the
          Agreement) to sell Motorola Israel Ltd. all of its holdings of
MIRS.           In connection with the closing of the transactions contemplated by this
          Agreement the existing lawsuit among the parties and other relating to MIRS was
          dismissed.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | On
October 3, 2005 the Company, through Ampal Communications L.P., completed           the
sale to Motorola Israel Ltd. of all of its holdings of MIRS pursuant to the
          Agreement. In connection with the sale of its holdings of MIRS, Ampal
          Communications L.P. received approximately US $89 million of total proceeds,
          composed of $67.7 million for the purchase price and an additional $ 21.3
          million related to guaranteed dividend payments. Approximately $ 74.0 million
of           the proceeds was used to repay all outstanding debt to banks incurred in
          connection with making the MIRS investment, and the Company received US$ 15.0
          million ($11.0 million after the deduction of minority interest) of net
proceeds           from the sale.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

61

---

---



| | 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 10,249,609
($2.2 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 4,022,085 ($873,800) if a final judgment against the Company will be given.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|Note 16 |  | Subsequent
Events
|------- | - | -----------------

| | None
| | ----

|Note 17 |  | Quarterly Financial Information (Unaudited)
|------- | - | -------------------------------------------

The table below provides the results
of comprehensive income (loss) including the sale of available for sale securities. In the
previously filed quarterly reports, the item Sale of available for sale
securities was not included in the Statement of Comprehensive Income (Loss). The
table below reflects the corrected comprehensive income (loss) figures.

Consolidated Statements of
Comprehensive Income (loss) is presented for the following periods in 2005:

|                                               | Three Months endedMarch 31, 2005 | Six Months Ended June 30, 2005 | Nine Months EndedSeptember 30, 2005
|---------------------------------------------- | -------------------------------- | ------------------------------ | -----------------------------------
|
|
|
|
|Net income  (loss)                             |                                  |                                | $                                  
|                                               |                                  |                                |                                    
|Other comprehensive (loss) income, net of tax: |                                  |                               
|Foreign currency translation adjustment        |                                  |                                |                                    
|Unrealized gain (loss) on securities           |                                  |                                |                                    
|Sale of available for sale securities          |                                  |                                |                                    
|                                               |                                  |                                |                                    
|Other comprehensive (loss) income              |                                  |                                |                                    
|                                               |                                  |                                |                                    
|                                               |                                  |                               
|Comprehensive income (loss)                    |                                  |                                | $                                  
|                                               |                                  |                                |                                    

62

---

---



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

| | None.
| | -----

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

Disclosure Controls and
Procedures

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

Internal Control Over
Financial Reporting

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

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

| | None
| | ----

63

---

---



# 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 6, 2006:

|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                                                      
|Dr. Joseph Yerushalmi(1)   | Director                                                      
|Yehuda Karni(1) (2) (3)(4) | Director                                                      
|Eitan Haber(2) (3)(4)      | Director                                                      
|Menahem Morag(2) (3)(4)    | Director                                                      
|Irit Eluz                  | CFO, Senior Vice President - Finance and Treasurer            
|Yoram Firon                | Vice President-Investments and Corporate Affairs and Secretary
|Amit Mantsur               | Vice President-Investments                                    
|Giora Bar-Nir              | Vice President - Accounting and Controller                    

---

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

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

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

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

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

In
2005, the Board met seven times and acted 4 times by written consent; the Executive
Committee met two times and did not act by written consent; the Audit Committee met five
times and did not act by written consent. The Stock Option and Compensation Committee met
one time and did not act by written consent. The Special Committee met two times and did
not act by written consent. All directors attended more than 75% of the aggregate of (1)
the total number of Board meetings held during the period in 2005 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 2005 (during the period of such service).
Each director of the Board is elected for a one year term and serves until his or her
successor is duly elected and qualified.

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

64

---

---



YOSEF
A. MAIMAN, 60, has been the Chairman of the Board of Ampal since April 25, 2002. Mr.
Maiman has been President and Chief Executive Officer of Merhav M.N.F. Ltd.
(Merhav), one of the largest international project development companies based
in Israel, since its founding in 1975. Mr. Maiman is also the Chairman of the Board of
Directors of Channel Ten, a commercial television station in Israel, a director of Eltek,
Ltd. (Eltek), a developer and manufacturer of printed circuit boards, a member
of the Board of Directors of the Middle East Task Force of the New York Council on Foreign
Relations and Honorary Consul to Israel from Peru. Mr. Maiman is also member of the Board
of Trustees of the Tel Aviv University, Chairman of the Israeli Board of the Jaffee Center
for Strategic Studies at Tel Aviv University, a member of the Board of Governors of Ben
Gurion University, and the Chairman of the Board of Trustees of the International Policy
Institute for Counter Terrorism.

JACK
BIGIO, 40 has been the President and Chief Executive Officer of Ampal since April 25,
2002, and a director of Ampal since March 6, 2002. From 1996 until April 2002, Mr. Bigio
served as Senior Vice President  Operations and Finance of Merhav. Mr. Bigio is also a
director of Eltek, a member of the Board of Israel-America Chamber of Commerce &
Industry and a member of Young Presidents Organization.

LEO
 MALAMUD,  54, has been a director  of Ampal  since  March 6, 2002.  Since  1995,  Mr.
 Malamud is Senior Vice President of Merhav.  Mr. Malamud is also a director of Eltek.

Dr.
          JOSEPH YERUSHALMI, 68, 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, 77, 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, 66, was the Head of Bureau for the former Prime Minister of Israel, Yitzhak Rabin,
from July 1992 until November 1995. Since 1996, Mr. Haber has been the President and Chief
Executive Officer of Geopol Ltd., which represents the Korean conglomerate Samsung
Aircraft and Industries in Israel and the Middle East; Kavim Ltd., a production and
project development company; Mr. Haber is a member in the Board of Directors of Africa
Israel Ltd. Mr. Haber is also a member of various non-profit organizations. He has been a
director of Ampal since August 16, 2002.

MENAHEM
MORAG, 55, has been a director of Ampal since January 27, 2004. From 1996 to 1999 Mr.
Morag was the Head of Finance and Budget at the Israeli Prime Ministers office in
Tel Aviv. From 1999 to 2001, Mr. Morag was the Controller and Ombudsman at the Israeli
Prime Ministers office in Tel Aviv. From 2001 to 2003, Mr. Morag was the Head of
Human Resources Department at the Israeli Prime Ministers office in Tel Aviv. Since,
2003, Mr. Morag has been the Head of the Council of the Pensioners Association of the
Israeli Prime Ministers office in Tel Aviv, director in Palram Industries since 2004
and since 2005 he is the CEO of Keren-Shemesh Foundation for the Encouragement of Young
Entrepreneurs.

IRIT
ELUZ, 39, has been the Chief Financial Officer and Senior Vice President  Finance
and Treasurer since October 2004. From May 2002 through October 2004 Ms. Eluz was Chief
Financial Officer and Vice President  Finance and Treasurer. From January 2000
through April 2002, Ms. Eluz was the Associate Chief Financial Officer of Merhav. From
June 1995 through December 1999, Ms. Eluz was the Chief Financial Officer of Kamor Group.

YORAM
FIRON, 37, 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, 36, 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.

65

---

---



GIORA
BAR-NIR, 49, has been Vice-President  Accounting and Controller Since October 2004.
From March 2002 through October 2004 Mr. Bar-Nir has been the Controller. During the
preceding five years, Mr. Bar-Nir was the Controller of the Israeli subsidiaries of Ampal.

# AUDIT COMMITTEE

The
Company has an Audit Committee of the Board consisting of Messrs. Karni, Haber and Morag,
each of whom is an independent director as defined under the rules of the National
Association of Securities Dealers, Inc. and the rules promulgated by the Securities and
Exchange Commission. The Board has determined that Mr. Morag is an audit committee
financial expert for purposes of the rules promulgated by the Securities and
Exchange Commission.

# SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE

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

# CODE OF ETHICS

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

# CODE OF CONDUCT

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

66

---

---



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

# Summary Compensation
Table

The
table below presents information regarding remuneration paid for services to Ampal and its
subsidiaries by the executive officers named below during the three fiscal years ended
December 31, 2005, 2004 and 2003.

|Name and Principal
Position | Year | Salaries | Bonus | Other
Annual
Compensation(9) | Long-Term
Compensation
Number of
Securities
Underlying
Options (10) | All
Other
Compensation
(U.S. Dollars)(11)
|--------------------------- | ---- | -------- | ----- | ---------------------------- | ------------------------------------------------------------------- | -----------------------------------------
|
|
|
|
|Yosef A. Maiman (1)(12)     |      |          | 2005  |                              |                                                                     |                                          
|Chairman of the Board       |      |          | 2004  |                              |                                                                     |                                          
|                            |      |          | 2003  |                              |                                                                     |                                          
|                            |      |         
|Jack Bigio (2)(12)          |      |          | 2005  |                              |                                                                     |                                          
|President and CEO           |      |          | 2004  |                              |                                                                     |                                          
|                            |      |          | 2003  |                              |                                                                     |                                          
|                            |      |         
|Irit Eluz (3)(12)           |      |          | 2005  |                              |                                                                     |                                          
|CFO - SVP Finance &         |      |          | 2004  |                              |                                                                     |                                          
|Treasurer                   |      |          | 2003  |                              |                                                                     |                                          
|                            |      |         
|Yoram Firon (4)(12)         |      |          | 2005  |                              |                                                                     |                                          
|Secretary, Vice             |      |          | 2004  |                              |                                                                     |                                          
|President and               |      |          | 2003  |                              |                                                                     |                                          
|Corporate Affairs           |      |         
|                            |      |         
|Amit Mantsur(5)             |      |          | 2005  |                              |                                                                     |                                          
|Vice President -            |      |          | 2004  |                              |                                                                     |                                          
|Investments                 |      |          | 2003  |                              |                                                                     |                                          
|                            |      |         
|Shlomo Shalev (6)(7)(8)     |      |          | 2005  |                              |                                                                     |                                          
|Senior Vice President       |      |          | 2004  |                              |                                                                     |                                          
|investment                  |      |          | 2003  |                              |                                                                     |                                          

|(1) | Mr.
Maiman has been employed by Ampal since April 25, 2002 as Chairman of the
               Board.
|--- | ---------------------------------------------------------------------------------------------------

|(2) | Mr.
Bigio has been employed by Ampal since April 25, 2002 as President and CEO.
|--- | -------------------------------------------------------------------------------

|(3) | Ms.
Eluz has been employed by Ampal since April 25, 2002.
|--- | ---------------------------------------------------------

|(4) | Mr
Firon has been employed by Ampal since April 25, 2002.
|--- | ---------------------------------------------------------

|(5) | Mr.
Mantsur has been employed by Ampal since February 2, 2003.
|--- | --------------------------------------------------------------

|(6) | Mr.
Shalev served as Senior Vice President Investment from May 21, 2002 until
               November 30, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------

|(7) | Mr.
Shalev retired on November 30, 2005, the amounts include final account
               settlement.
|--- | -----------------------------------------------------------------------------------------------------

|(8) | Mr.
Shalev exercised 73,125 options on December 7, 2005.
|--- | --------------------------------------------------------

|(9) | Consists
of amounts reimbursed for the payment of taxes.
|--- | --------------------------------------------------------

|(10) | Represents
the number of shares of Class A Stock underlying options granted to                the
named executive officers.
|---- | ---------------------------------------------------------------------------------------------------------------------------

|(11) | Comprised
of Ampal (Israels) contribution pursuant to : (1) Ampal                (Israels)
Pension Plan and (ii) Ampal (Israels) education fund and                (iii) use
of car and (iv) use of mobile (v) final account settlement.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Eligible
to receive an additional payment of up to six months salary (i) in the
               event of a change of control of the Company and (ii) such executive
               officers employment is terminated within six months from the date of
the                change of control of the Company.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

67

---

---



# Fiscal Year-End Option
Values

|                | Number of Securities Underlying
Unexercised Options at Fiscal Year
End 2005 | Unrealized Value of
In-the-Money Options
(U.S. Dollars)
|--------------- | --------------------------------------------------------------------------- | -------------------------------------------------------
|
|
|
|
|Yosef A. Maiman |                                                                             |                                                        
|Jack Bigio      |                                                                             |                                                        
|Irit Eluz       |                                                                             |                                                        
|Yoram Firon     |                                                                             |                                                        
|Amit Mantsur    |                                                                             |                                                        

# Option Grants In Last
Fiscal Year

No stock options were granted to
purchase our Class A Stock to our named executive officers during fiscal year ended
December 31, 2005.

Other Benefits

Ampal
previously maintained a money purchase pension plan (Pension Plan) for all
full-time employees of Ampal except non-resident aliens outside the United States.
Pursuant to the cessation of the Companys U.S. operations, the
Ampal-American Israel Corporation Money Purchase Pension Plan and the Ampal-American
Israel Corporation Savings Plan were terminated effective December 31, 2004.

Compensation of Directors

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

On
October 28, 2004, the Board formed a Special Committee of the Board composed of Mr. Yehuda
Karni, Mr. Eitan Haber and Mr. Menahem Morag, each of whom is an independent director.

The
Board appointed the Special Committee of independent directors to consider alternatives
available to the Company to maximize shareholder value. The Special Committee was formed
in response to a suggestion from Mr. Yosef A. Maiman, Chairman of the Board and
controlling stockholder, that he is reviewing his alternatives with regard to his
investment in the Company.

In
connection with the formation of this Special Committee, the Company entered into an
Indemnification and Compensation Agreement with each of Messrs. Karni, Haber and Morag. In
consideration for serving as a member of the Special Committee, each director shall
receive from the Company a fee of $35,000 payable in seven equal monthly installments
beginning on October 28, 2004. Each director shall also be entitled to receive from the
Company a fee of $1,500 per each meeting of the Special Committee he attends. In addition,
the Company has agreed to indemnify and hold harmless each Director with respect to his
service on, and any matter or transaction considered by, the Special Committee to the
fullest extent authorized or permitted by law. A copy of the form of this Indemnification
and Compensation Agreement is attached as Exhibit 10j to this annual report on Form 10-K.

68

---

---



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 2005, 2004
and 2003.

|                  | 2005 | 2004 | 2003
|----------------- | ---- | ---- | ----
|
|
|
|
|Jack Bigio (1)    |      |      |     
|Eitan Haber (2)   |      |      |     
|Yehuda Karni (2)  |      |      |     
|Menahem Morag (3) |      |      |     

(1)
          Since March 6, 2002. 
(2)
          Since August 16, 2002 . 
(3)
          Since March 24, 2004.

Stock Option Plan

In
March 1998, the Board approved a Long-Term Incentive Plan (1998 Plan)
permitting the granting of options to all employees, officers, directors and consultants
of the Company and its subsidiaries to purchase up to an aggregate of 400,000 shares of
Class A Stock. The 1998 Plan was approved by a majority of the Companys shareholders
at the June 19, 1998 annual meeting of shareholders. The 1998 Plan remains in effect for a
period of ten years. As of December 31, 2005, 30,000 options of the 1998 Plan are
outstanding.

On
February 15, 2000, the Stock Option Committee approved a new Incentive Plan (2000
Plan), under which the Company has reserved 4 million shares of Class A Stock,
permitting the granting of options to all employees, officers and directors. The 2000 Plan
was approved by the Board of Directors at a meeting held on March 27, 2000 and was
approved by a majority of the Companys shareholders at the June 29, 2000 annual
meeting of shareholders. The 2000 Plan remains in effect for a period of ten years. As of
December 31, 2005, 1,994,500 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 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.

69

---

---



The
Company accounts for all plans under APB Opinion No. 25, under which no compensation costs
were incurred in the years ended December 31, 2003, 2004 and 2005. If compensation cost
for the options under the above Plans had been determined in accordance with SFAS No. 123,
the Companys net income (loss) would have been ($6,832) million, ($18,954) million
and $8,351 million, for the years 2005, 2004 and 2003, respectively.

# COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION

The
current members of the Stock Option and Compensation Committee are Mr. Yehuda Karni, Mr.
Eitan Haber and Mr. Menahem Morag, none of whom is an officer or employee or former
officer or employee of the Company.  During 2005, no executive officer of the Company
served on the Stock Option and Compensation Committee, or the Board of Directors of
another entity whose executive officer(s) served on the Companys Stock Option and
Compensation Committee of the Board of Directors.

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

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

| | (1) | All
information provided as of December 31, 2005.
| | --- | -------------------------------------------------

| | (2) | The
number of securities remaining available for future issuance under 1998 Plan
               is 370,000. The number of securities remaining available for future
issuance                under 2000 Plan is 2,005,500.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

70

---

---



# PRINCIPAL SHAREHOLDERS
OF AMPAL

The
following table sets forth information as of March 6, 2006, as to the holders known to
Ampal who beneficially own more than 5% of the Class A Stock, the only outstanding series
of voting securities of Ampal. For purposes of computation of the percentage ownership of
Class A Stock held by such stockholders set forth in the table, conversion of any 4%
Cumulative Convertible Preferred Stock (the 4% Preferred Stock) and 6 1/2%
Cumulative Convertible Preferred Stock (the 6 1/2% Preferred Stock) owned by
such beneficial owner has been assumed, without increasing the number of shares of Class A
Stock outstanding by amounts arising from possible conversions of convertible securities
held by shareholders other than such beneficial owner. As of March 6, 2006, there were
20,157,772 (not including treasury shares) shares of Class A Stock of Ampal outstanding.
In addition, as of March 6, 2006, there were 501,227 non-voting shares of 6 1/2% Preferred
Stock outstanding (each convertible into 3 shares of Class A Stock) and 110,296 non-voting
shares of 4% Preferred Stock outstanding (each convertible into 5 shares of Class A
Stock).

Security Ownership of
Certain Beneficial Owners

|Name and Address
of Beneficial Owner    | Title of Class | Number of Shares
and Nature
of Beneficial Ownership | Percent
of Outstanding
Shares of
Class A Stock
|--------------------------------------- | -------------- | --------------------------------------------------- | ----------------------------------------------
|
|
|
|
|Y.M. Noy Investments Ltd., of 33        |                |                                                     |                                               
|Havazelet Hasharon St., Herzliya,       |                |                                                    
|Israel                                  |                |                                                     | Class A Stock                                 
|                                        |                |                                                    
|Yosef A. Maiman                         |                |                                                    
|Y.M. Noy Investments Ltd., of 33        |                |                                                    
|Havazelet Hasharon St., Herzliya,Israel |                |                                                     | Class A Stock                                 
|                                        |                |                                                    
|Ohad Maiman                             |                |                                                    
|Y.M. Noy Investments Ltd., of 33        |                |                                                    
|Havazelet Hasharon St., Herzliya,Israel |                |                                                     | Class A Stock                                 
|                                        |                |                                                    
|Noa Maiman                              |                |                                                    
|Y.M. Noy Investments Ltd., of 33        |                |                                                    
|Havazelet Hasharon St., Herzliya,Israel |                |                                                     | Class A Stock                                 

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

| | (2) | Includes
218,750 shares of Class A Stock underlying options which are currently
               exercisable by Mr. Maiman.
| | --- | -------------------------------------------------------------------------------------------------------------------------

71

---

---



Security Ownership of
Management

The
following table sets forth information as of March 6, 2006 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                         |                                                                      |                                               
|Jack Bigio                           |                                                                      |                                               
|Irit Eluz                            |                                                                      |                                               
|Yoram Firon                          |                                                                      |                                               
|Amit Mantsur                         |                                                                      |                                               
|Leo Malamud                          |                                                                      |                                               
|Dr. Joseph Yerushalmi                |                                                                      |                                               
|Eitan Haber                          |                                                                      |                                               
|Yehuda Karni                         |                                                                      |                                               
|Menahem Morag                        |                                                                      |                                               
|All Directors and Executive Officers |                                                                      |                                               
|as a Group                           |                                                                      |                                               

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

| | (1) | Attributable
to 11,750,132 shares of Class A Stock held directly by Y.M. Noy Investments Ltd. See
Security Ownership of Certain Beneficial Owners.In addition, this represents
218,750 shares underlying options for Yosef Maiman which are presently exercisable.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|ITEM 13. | CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------

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

On
December 1, 2005, the Company, through Merhav Ampal Energy Ltd., a wholly-owned subsidiary
of the Company, entered into an agreement (the Agreement) with Merhav M.N.F.
Ltd. (Merhav) for the purchase from Merhav of a portion of its interest in
EMG.

Under
the terms of the transaction, the Company acquired the beneficial ownership of 1,200
shares of EMGs capital stock, representing a 2% beneficial ownership in EMG. The
purchase price for the shares was $29,960,000. Additionally, the Company was granted the
exclusive right to negotiate to acquire a substantial portion of Merhavs remaining
shares of EMG. The Company also has the right for a period of time to require Merhav to
repurchase the EMG interest.

Yosef
A. Maiman, the Chairman of the Board and the Companys controlling shareholder, is
the sole owner of Merhav. Because of the foregoing relationship, the Special Committee,
which is identical in composition to the Audit Committee, negotiated and approved the
transaction. Houlihan Lokey Howard & Zukin Financial Advisors, Inc. acted as financial
advisors to the Special Committee.

72

---

---



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

AUDIT
FEES. The fees of Kesselman & Kesselman (Kesselman) fees for professional
services rendered for the audit of the Companys annual financial statements for the
fiscal years ended December 31, 2005 and December 31, 2004 and reviewing the financial
statements included in the Companys quarterly reports on Form 10-Q were $266,000 and
$267,000, respectively.

TAX
FEES. Kesselmans tax fees for the fiscal years ended December 31, 2005 and December
31, 2004, were $209,000 and $100,000, respectively.

ALL
OTHER FEES  Kesselmans fees for other services for the fiscal years ended
December 31, 2005 and December 31, 2004, were $236,000 and $42,800, respectively.

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

Audit Committee
Pre-Approval Policies

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

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

73

---

---



# PART IV

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

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

|                                                                                            | Page
Reference
|------------------------------------------------------------------------------------------- | --------------
|
|
|
|
|(1) Financial Statements and Supplementary Data                                             |               
|                                                                                           
|Ampal-American Israel Corporation and Subsidiaries                                         
|                                                                                           
|Report of Independent Registered Public Accounting Firm                                     | 31            
|                                                                                           
|Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003      | 32            
|                                                                                           
|Consolidated Balance Sheets as of  December 31, 2005 and 2004                               | 33-34         
|                                                                                           
|Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003. | 35-36         
|                                                                                           
|Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31,
|2005, 2004 and 2003                                                                         | 37-38         
|                                                                                           
|Consolidated Statements of Comprehensive Income for the years ended December 31, 2005, 2004
|and 2003                                                                                    | 39            
|                                                                                           
|Notes to Consolidated Financial Statements                                                  | 40-62         
|                                                                                           
|Supplementary Data:                                                                        
|                                                                                           
|Selected quarterly financial data for the years ended December 31, 2005 and 2004            | 24            

74

---

---



(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, 2005

# Representative Rates
of Exchange 
Between the U.S. Dollar and the New Israeli Shekel 
For the Three Years
Ended December 31, 2005

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

|             | 2005 | 2004 | 2003
|------------ | ---- | ---- | ----
|
|
|
|
|March 31     |      |      |     
|June 30      |      |      |     
|September 30 |      |      |     
|December 31  |      |      |     

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

Granite Hacarmel Investments Limited and Subsidiaries

|                                                                                                       | 
|------------------------------------------------------------------------------------------------------ | 
|
|
|
|
|Report of Certified Public Accountants                                                                 | 
|Consolidated Balance Sheets as at December 31, 2003 and 2002                                           | 
|Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001                 | 
|Consolidated Statements of Shareholders' Equity for the years ended December 31, 2003, 2002 and        | 
|2001                                                                                                   | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001             | 
|Notes to Consolidated Financial Statements                                                             | 
|                                                                                                       | 
|Ophir Holdings Ltd.                                                                                    | 
|                                                                                                       | 
|Report of Certified Public Accountants                                                                 | 
|                                                                                                       | 
|Consolidated Balance Sheets as at December 31, 2005 and 2004                                           | 
|Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003                 | 
|Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2005, 2004 | 
|and 2003                                                                                               | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003             | 
|Notes to Financial Statements                                                                          | 
|                                                                                                       | 
|Ophirtech Ltd.                                                                                         | 
|                                                                                                       | 
|Report of Certified Public Accountants                                                                 | 
|Consolidated Balance Sheets as at December 31, 2005 and 2004                                           | 
|Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003                 | 
|Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2005,      | 
|2004 and 2003                                                                                          | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004                      | 
|and  2003                                                                                              | 
|Notes to Financial Statements                                                                          | 

75

---

---



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

| |  | 
| |  | 
|
|
|
|
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 

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

76

---

---



# Exhibit 10 
Material Contracts

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

|10b. | Agreement,
dated March 30, 1994, between Poalim Investments Ltd., Ampal           (Israel) Ltd.
and Ampal Industries (Israel) Ltd. (Translation). (Filed as           Exhibit 10l, to
Form 10-K for the fiscal year ended December 31, 1994 and           incorporated
herein by reference, File No. 0-538).
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10c. | Loan
Agreement, dated April 27, 1998, between Bank Hapoalim Ltd. and Ampal
          Communications Limited Partnership (Filed as Exhibit 10.1 to Report on Form
10-Q           for the quarter ended June 30, 1998, File No. 0-538).
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10d. | Form
of Loan Agreement between Ampal Communications Limited Partnership and           Bank
Leumi Le-Israel B.M. Filed as Exhibit 10.2 to Report on Form 10-Q for the
          quarter ended June 30, 1998, File No. 0-538).
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|10f. | The
Companys 1998 Long-Term Incentive Plan (filed as Exhibit A to the           Companys
Proxy Statement for the 1998 Annual Meeting of Shareholders).*
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

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

|10h. | Amendment
to the Companys 1998 Long Term Incentive Plan adopted by the           Board of
Directors on February 14, 2002.* (Filed as Exhibit 10h to the report on           Form
10K. Filed on March 27, 2003)
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

|10l. | Omnibus Agreement, dated as of December 1, 2005, between Merhav Ampal Energy
                                        Limited and Merhav  (M.N.F.) Limited.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

* Management
contract, compensatory plan or arrangement.

77

---

---



Exhibit 11  Statement re Computation of Earnings Per Share

Exhibit 12  Statement re Computation of Ratios

Exhibit 21  Subsidiaries of the Registrant

Exhibit 23  Consents of Experts and Counsel:

|      |                                                                                                 |        
|----- | ----------------------------------------------------------------------------------------------- | -------
|23.1  | Brightman Almagor & Co., Certified Public Accountants A member firm of Deloitte Touche Tohmatsu | E-23.1 
|      |                                                                                                 |        
|23.2  | Kesselman & Kesselman CPAs (Isr) A member of PricewaterhouseCoopers International Limited       | E-23.2 
|      |                                                                                                 |        
|23.3  | Brightman Almagor & Co., Certified Public Accountants A member firm of Deloitte Touche Tohmatsu | E-23.3 
|      |                                                                                                 |        
|23.4  | Kost Forer Gabbay & Kasierer Member of Ernst & Young Global                                     | E-23.4 
|      |                                                                                                 |        
|23.5  | Kesselman & Kesselman CPAs (Isr) A member of PricewaterhouseCoopers International Limited       | E-23.5 
|      |                                                                                                 |        
|23.6  | Fahn, Kanne & Co. Certified Public Accountants (Isr.)                                           | E-23.6 
|      |                                                                                                 |        
|23.7  | Kost Forer Gabbay & Kasierer Member practice of Ernst & Young Global                            | E-23.7 
|      |                                                                                                 |        
|23.8  | Somekh Chaikin, Certified Public Accountants (Isr.)                                             | E-23.8 
|      |                                                                                                 |        
|23.9  | Somekh Chaikin, Certified Public Accountants (Israel)                                           | E-23.9 
|      |                                                                                                 |        
|23.10 | Somekh Chaikin, Certified Public Accountants (Israel)                                           | E-23.10
|      |                                                                                                 |        
|23.11 | Kesselman & Kesselman CPAs (Isr) A member of PricewaterhouseCoopers International Limited       | E-23.11
|      |                                                                                                 |        
|23.12 | Kesselman & Kesselman CPAs (Isr) A member of PricewaterhouseCoopers International Limited       | E-23.12
|      |                                                                                                 |        
|23.13 | Kost Forer Gabbay & Kasierer Member practice of Ernst & Young Global                            | E-23.13

78

---

---



Exhibit 31.1  Certification of Jack Bigio pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

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

79

---

---



# SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 29th day of March, 2006.

| |  | AMPAL-AMERICAN
ISRAEL CORPORATIONBY: /S/ JACK BIGIO
Jack Bigio, Chief Executive Officer andPresident (Principal Executive Officer)
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------

Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this Report has
been signed below by the following persons on behalf of the Registrant and in the
capacities indicated on March 24, 2004.

|Signatures | Title | Date
|---------- | ----- | ----

|/s/ YOSEF A. MAIMAN
    Yosef A. Maiman | Chairman of the Board of
Directors | March 29, 2006
|----------------------------------------------------- | ---------------------------------- | --------------

|/s/ JACK BIGIO
    Jack Bigio | President & CEO - Director | March 29, 2006
|------------------------------------------- | -------------------------- | --------------

|/s/ LEO MALAMUD
    Leo Malamud | Director | March 29, 2006
|--------------------------------------------- | -------- | --------------

|/s/ DR. JOSEPH YERUSHALMI
    Dr. Joseph Yerushalmi | Director | March 29, 2006
|----------------------------------------------------------------- | -------- | --------------

|/s/ YEHUDA KARNI
    Yehuda Karni | Director | March 29, 2006
|----------------------------------------------- | -------- | --------------

|/s/ EITAN HABER
    Eitan Haber | Director | March 29, 2006
|--------------------------------------------- | -------- | --------------

|/s/ MENAHEM MORAG
    Menahem Morag | Director | March 29, 2006
|------------------------------------------------- | -------- | --------------

|/s/ IRIT ELUZ
    Irit Eluz | CFO, Senior Vice President -  
Finance  and Treasurer
(Principal Financial Officer) | March 29, 2006
|----------------------------------------- | ----------------------------------------------------------------------------------- | --------------

|/s/ GIORA BAR - NIR
    Giora Bar-Nir | VP Accounting &Controller
 (Principal Accounting Officer) | March 29, 2006
|--------------------------------------------------- | --------------------------------------------------------- | --------------

80

---

---

Granite
Hacarmel Investments Limited
and  its Subsidiaries

Financial Statements

as at December 31, 2003

---

---

Granite
Hacarmel Investments Limited and its Subsidiaries

|Financial Statements  December 31,
  2003
|------------------------------------------
|                                          

CONTENTS

|                                                             | Page   
|------------------------------------------------------------ | -------
|                                                             |        
|                                                             |        
|Auditors report to the shareholders                         | 3      
|                                                             |        
|Consolidated balance sheets                                  | 4 -5   
|                                                             |        
|Consolidated statements of income                            | 6      
|                                                             |        
|Consolidated statements of changes
  in shareholders equity | 7      
|                                                             |        
|Consolidated statements of cash
  flows                      | 8 - 10 
|                                                             |        
|Notes to the financial statements                            | 11 - 78
|                                                             |        
|List of the main investee companies
  -                      | 79 - 80

-2-

---

---

Somekh
Chaikin

# REPORT OF  INDEPENDENT  PUBLIC ACCOUNTING FIRM

# THE SHAREHOLDERS OF
GRANITE HACARMEL INVESTMENTS LIMITED

We have audited the accompanying
consolidated balance sheets of Granite Hacarmel Investments Limited and its subsidiaries
(the Company) as of December 31, 2003 and 2002, 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, 2003. 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 statement of the following affiliates:

| |  | Nitzba Holdings 1995 Ltd. (Nitzba), a 10 percent owned investee company, in
respect to which the Companys investment was NIS 75,400 thousands as of December 31,
2003 and the Companys equity in its losses was NIS 9,900 thousands for the year then
ended. Those financial statements were prepared on the basis of generally accepted
accounting principles in Israel ( Israeli GAAP).
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | L.D.I. Leasing Dynamics International Ltd. (LDI), a 25 percent owned investee
company, in respect to which the Companys investment was NIS 9,200 thousands and NIS
9,900 thousands as of December 31, 2003 and 2002, respectively and the Companys
equity in its losses was NIS 700 thousand and 1,000 thousands for the years ended December
31 2003 and 2002, respectively. Those financial statements were prepared on the basis of
Israeli GAAP.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Oganim Beyarok Ltd (Oganim)., a 50 percent owned investee company, in respect
to which the Companys excess of accumulated losses over the cost of investments was
NIS 300 thousands and NIS 140 thousands as of December 31, 2003 and 2002, respectively and
the Companys equity in its losses was NIS 1,000 thousand and NIS 2,300 thousands for
the years ended December 31, 2003 and 2002, respectively. Those financial statements were
prepared on the basis of Israeli GAAP with reconciliation from Israeli GAAP to generally
accepted accounting principles in the United States ( U.S. GAAP).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The financial statements of the
affiliates referred above were audited by other auditors whose reports thereon were
furnished to us, and our opinion, insofar as it relates to the amounts included for Nitzba
and LDI, before conversion to U.S. GAAP and to Oganim for both Israeli GAAP and conversion
to U.S GAAP, is based solely on the said reports of the 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 in accordance with generally
accepted auditing standards as established by the Auditing Standards Board (United States)
and in accordance with the auditing standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit 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 (which
include procedures relating to the adjustments to convert information with respect to
Nitzba and LDI as reported under Israeli GAAP to amounts reported under generally
accepted accounting principles in the United States) provide a reasonable basis for our
opinion.

In our opinion, based on 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, 2003 and 2002, and the results of their operations and their
cash flows for each of the years, in the three-year period ended December 31, 2003 in
conformity with accounting principles generally accepted in Israel.

Accounting principles generally
accepted in Israel vary in certain significant respects from accounting principles
generally accepted in the United States of America. Information relating to the nature of
such differences is presented in Note 32 to the consolidated financial statements.

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.

As discussed in Note 28.B.2 to the
financial statements there are few claims against consolidated companies which the court
has been asked to recognize as class actions and other claims against consolidated
companies claiming that their agreements with their customers are restrictive trade
arrangements.

Somekh Chaikin Certified
Public Accountants (Israel)

Haifa Israel, March 25,
2004

-3-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

|Consolidated balance sheets as at
  December 31
|-----------------------------------------------
|                                               
|Adjusted to NIS of December 2003               

|                                               |  |      |    |               | 2003 |               | 2002      | 
|---------------------------------------------- |  | ---- | -- | ------------- | ---- | ------------- | --------- | 
|                                               |  |      |    |               |      |               |           | 
|                                               |  | Note |    | NIS thousands |      | NIS thousands |          
|                                               |  |      |    |               |      |               |          
|                                               |  |      |    |               |      |               |           | 
|Current assets                                 |  |      |    |               |      |               |           | 
|                                               |  |      |    |               |      |               |           | 
|Cash and cash equivalents                      |  |      | 5  |               |      |               | 7,479     | 
|Marketable securities                          |  |      |    |               |      |               | 2,927     | 
|Trade receivables                              |  |      | 6  |               |      |               | 965,614   | 
|Other receivables                              |  |      | 6  |               |      |               | 71,737    | 
|Receivables for work in progress               |  |      | 6  |               |      |               | 14,443    | 
|Inventories                                    |  |      | 7  |               |      |               | 195,842   | 
|Affiliated company designated for sale         |  |      | 8  |               |      |               | 12,516    | 
|                                               |  |      |    |               |      |               |           | 
|                                               |  |      |    |               |      |               | 1,270,558 | 
|                                               |  |      |    |               |      |               |           | 
|                                               |  |      |    |               |      |               |           | 
|Non-current inventories                        |  |      | 7  |               |      |               | 110,981   | 
|                                               |  |      |    |               |      |               |           | 
|                                               |  |      |    |               |      |               |           | 
|Investments, loans and long-term
  receivables |  |      |    |               |      |               |           | 
|                                               |  |      |    |               |      |               |           | 
|Affiliated companies and other investments     |  |      | 8  |               |      |               | 130,504   | 
|Long-term loans and receivables                |  |      | 9  |               |      |               | 129,837   | 
|                                               |  |      |    |               |      |               |           | 
|                                               |  |      |    |               |      |               | 260,341   | 
|                                               |  |      |    |               |      |               |           | 
|                                               |  |      |    |               |      |               |           | 
|Fixed assets, net                              |  |      | 10 |               |      |               | 1,186,561 | 
|                                               |  |      |    |               |      |               |           | 
|                                               |  |      |    |               |      |               |           | 
|Other assets                                   |  |      | 11 |               |      |               | 209,049   | 
|                                               |  |      |    |               |      |               |           | 
|                                               |  |      |    |               |      |               |           | 
|                                               |  |      |    |               |      |               |           | 
|                                               |  |      |    |               |      |               | 3,037,490 | 
|                                               |  |      |    |               |      |               |           | 

* Reclassified

The notes to the
financial statements are an integral part thereof.

-4-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

|Consolidated balance sheets as at
  December 31
|-----------------------------------------------
|                                               
|Adjusted to NIS of December 2003               

|                                                     |  |      |    |               | 2003 |               | 2002      | 
|---------------------------------------------------- |  | ---- | -- | ------------- | ---- | ------------- | --------- | 
|                                                     |  |      |    |               |      |               |           | 
|                                                     |  | Note |    | NIS thousands |      | NIS thousands |          
|                                                     |  |      |    |               |      |               |          
|                                                     |  |      |    |               |      |               |           | 
|Current liabilities                                  |  |      |    |               |      |               |           | 
|                                                     |  |      |    |               |      |               |           | 
|Credit from banks and others                         |  |      | 12 |               |      |               | 1,322,402 | 
|Trade payables                                       |  |      | 13 |               |      |               | 189,090   | 
|Other payables                                       |  |      | 14 |               |      |               | 195,788   | 
|                                                     |  |      |    |               |      |               |           | 
|                                                     |  |      |    |               |      |               | 1,707,280 | 
|                                                     |  |      |    |               |      |               |           | 
|                                                     |  |      |    |               |      |               |           | 
|Long-term liabilities                                |  |      |    |               |      |               |           | 
|                                                     |  |      |    |               |      |               |           | 
|Long-term loans                                      |  |      | 15 |               |      |               | 720,083   | 
|Customers deposits                                  |  |      | 16 |               |      |               | 58,102    | 
|Liabilities for severance pay, net                   |  |      | 17 |               |      |               | 22,835    | 
|Deferred taxes                                       |  |      | 26 |               |      |               | 68,585    | 
|                                                     |  |      |    |               |      |               |           | 
|                                                     |  |      |    |               |      |               | 869,605   | 
|                                                     |  |      |    |               |      |               |           | 
|                                                     |  |      |    |               |      |               |           | 
|Minority interests                                   |  |      |    |               |      |               | 8,133     | 
|                                                     |  |      |    |               |      |               |           | 
|                                                     |  |      |    |               |      |               |           | 
|Collateral, commitments and
  contingent liabilities |  |      | 28 |               |      |               |           | 
|                                                     |  |      |    |               |      |               |           | 
|Shareholders equity                                 |  |      | 19 |               |      |               | 452,472   | 
|                                                     |  |      |    |               |      |               |           | 
|                                                     |  |      |    |               |      |               |           | 
|                                                     |  |      |    |               |      |               |           | 
|                                                     |  |      |    |               |      |               |           | 
|                                                     |  |      |    |               |      |               | 3,037,490 | 
|                                                     |  |      |    |               |      |               |           | 
|* Reclassified                                       |  |      |    |               |      |               |           | 

Prof. I.
Borovich  Chairman of the
Board          _____________________

A. Sagis  President and Chief Executive
Officer            ___________________________

J.
Frohlich  Executive Vice President and Chief Financial Officer             __________________________

Date of
approval of statements:  March 25, 2004

The notes to the
financial statements are an integral part thereof.

-5-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

|Consolidated statements
  of income for the year ended December 31
|------------------------------------------------------------------
|                                                                  
|Adjusted to NIS of December 2003                                  

|                                                                                   |  |      |    |               | 2003 |  | 2002      |   | 2001 |          
|---------------------------------------------------------------------------------- |  | ---- | -- | ------------- | ---- |  | --------- | - | ---- | ---------
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|                                                                                   |  | Note |    | NIS thousands |     
|                                                                                   |  |      |    |               |     
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|Sales                                                                              |  |      |    |               |      |  | 4,263,369 |   |      | 4,274,194
|Less: Government imposts                                                           |  |      |    |               |      |  | 1,376,296 |   |      | 1,380,089
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|Net sales                                                                          |  |      | 20 |               |      |  | 2,887,073 |   |      | 2,894,105
|Cost of sales                                                                      |  |      | 21 |               |      |  | 2,127,117 |   |      | 2,134,658
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|Gross profit                                                                       |  |      |    |               |      |  | 759,956   |   |      | 759,447  
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|Selling and marketing expenses                                                     |  |      | 22 |               |      |  | 500,843   |   |      | 480,784  
|General and administrative expenses                                                |  |      | 23 |               |      |  | 154,012   |   |      | 109,968  
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|                                                                                   |  |      |    |               |      |  | 654,855   |   |      | 590,752  
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|Income from operations                                                             |  |      |    |               |      |  | 105,101   |   |      | 168,695  
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|Financing expenses, net                                                            |  |      | 24 |               |      |  | (130,505  | ) |      | (85,137  
|Other (expenses) income, net                                                       |  |      | 25 |               |      |  | (62,167   | ) |      | (23,830  
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|                                                                                   |  |      |    |               |      |  | (192,672  | ) |      | (108,967 
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|(Loss) 
  Income before taxes on income                                            |  |      |    |               |      |  | (87,571   | ) |      | 59,728   
|Taxes on income                                                                    |  |      | 26 |               |      |  | 9,628     |   |      | (28,109  
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|(Loss) Income after taxes on income                                                |  |      |    |               |      |  | (77,943   | ) |      | 31,619   
|Companys share in results of affiliated
       companies, net                     |  |      |    |               |      |  | (17,189   | ) |      | (5,184   
|Minority interest in the results of 
       subsidiaries                           |  |      |    |               |      |  | (914      | ) |      | (2,268   
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|Net (loss) income for the year                                                     |  |      |    |               |      |  | (96,046   | ) |      | 24,167   
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|Net (loss)earnings 
  per NIS 1 par value of
       ordinary shares (in NIS):      |  |      | 19 |               |      |  |           |   |      |          
|Primary and diluted (loss) income                                                  |  |      |    |               |      |  | (0.7      | ) |      | 0.17     
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|Number of shares of NIS 1 par value each 
  used in the calculation (in thousands) |  |      |    |               |      |  | 137,770   |   |      | 138,381  
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|                                                                                   |  |      |    |               |      |  |           |   |      |          
|* Reclassified                                                                     |  |      |    |               |      |  |           |   |      |          

The notes to the
financial statements are an integral part thereof.

-6-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

|Consolidated statements of changes
  in shareholders equity
|------------------------------------------------------------
|                                                            
|Adjusted to NIS of December 2003                            

|                                                        |  | Share 
  capital |         | Premium 
  on shares |  | Less
  Company
  shares held
  by a
  subsidiary |  | Dividend 
  declared 
  subsequent 
  to  balance 
  sheet date |        | Retained 
  earnings |  | Total   |  
|------------------------------------------------------- |  | ---------------- | ------- | -------------------- |  | ------------------------------------------------ |  | --------------------------------------------------------------- | ------ | -------------------- |  | ------- | -
|                                                        |  |                  |         |                      |  |                                                  |  |                                                                 |        |                      |  |         |  
|                                                        |  | NIS
  thousands  |        
|                                                        |  |                  |        
|Balance as at January 1, 2001                           |  |                  | 269,295 |                      |  | 274,365                                          |  |                                                                 | (3,603 | )                    |  | -       |  
|                                                        |  |                  |         |                      |  |                                                  |  |                                                                 |        |                      |  |         |  
|Changes in 2001:                                        |  |                  |         |                      |  |                                                  |  |                                                                 |        |                      |  |         |  
|                                                        |  |                  |         |                      |  |                                                  |  |                                                                 |        |                      |  |         |  
|Net income for the year                                 |  |                  | -       |                      |  | -                                                |  |                                                                 | -      |                      |  | -       |  
|Dividend paid                                           |  |                  |         |                      |  | -                                                |  |                                                                 | -      |                      |  | -       |  
|Acquisition of Companys shares 
       by a subsidiary |  |                  | -       |                      |  | -                                                |  |                                                                 | (280   | )                    |  | -       |  
|                                                        |  |                  |         |                      |  |                                                  |  |                                                                 |        |                      |  |         |  
|Balance as at December 31, 2001                         |  |                  | 269,295 |                      |  | 274,365                                          |  |                                                                 | (3,883 | )                    |  | -       |  
|                                                        |  |                  |         |                      |  |                                                  |  |                                                                 |        |                      |  |         |  
|Changes in 2002:                                        |  |                  |         |                      |  |                                                  |  |                                                                 |        |                      |  |         |  
|                                                        |  |                  |         |                      |  |                                                  |  |                                                                 |        |                      |  |         |  
|Net income for the year                                 |  |                  | -       |                      |  | -                                                |  |                                                                 | -      |                      |  | -       |  
|Dividend declared                                       |  |                  | -       |                      |  | -                                                |  |                                                                 | -      |                      |  | 77,009  | *
|Acquisition of Companys shares 
       by a subsidiary |  |                  | -       |                      |  | -                                                |  |                                                                 | (5,838 | )                    |  | -       |  
|                                                        |  |                  |         |                      |  |                                                  |  |                                                                 |        |                      |  |         |  
|Balance as at December 31, 2002                         |  |                  | 269,295 |                      |  | 274,365                                          |  |                                                                 | (9,721 | )                    |  | 77,009  |  
|                                                        |  |                  |         |                      |  |                                                  |  |                                                                 |        |                      |  |         |  
|Changes in 2003:                                        |  |                  |         |                      |  |                                                  |  |                                                                 |        |                      |  |         |  
|                                                        |  |                  |         |                      |  |                                                  |  |                                                                 |        |                      |  |         |  
|Net loss for the year                                   |  |                  | -       |                      |  | -                                                |  |                                                                 | -      |                      |  | -       |  
|Dividend paid                                           |  |                  | -       |                      |  | -                                                |  |                                                                 | -      |                      |  | (77,161 | )
|Erosion of dividend paid                                |  |                  | -       |                      |  | -                                                |  |                                                                 | -      |                      |  | 152     |  
|                                                        |  |                  |         |                      |  |                                                  |  |                                                                 |        |                      |  |         |  
|Balance as at December 31, 2003                         |  |                  | 269,295 |                      |  | 274,365                                          |  |                                                                 | (9,721 | )                    |  | -       |  
|                                                        |  |                  |         |                      |  |                                                  |  |                                                                 |        |                      |  |         |  

*Reclassified

The notes to the
financial statements are an integral part thereof.

-7-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

|Consolidated statements of cash
  flows for the year ended December 31
|----------------------------------------------------------------------
|                                                                      
|Adjusted to NIS of December 2003                                      

|                                                                                    |  | 2003          |          | 2002 |  | 2001     |   
|----------------------------------------------------------------------------------- |  | ------------- | -------- | ---- |  | -------- | --
|                                                                                    |  |               |          |      |  |          |   
|                                                                                    |  | NIS Thousands |         
|                                                                                    |  |               |         
|                                                                                    |  |               |          |      |  |          |   
|                                                                                    |  |               |          |      |  |          |   
|Cash flows from operating
  activities                                              |  |               |          |      |  |          |   
|Net (loss) income                                                                   |  |               | (96,046  | )    |  | 24,167   |   
|Reconciliations required to present cash flows 
     from operating activities (A)  |  |               | 232,622  |      |  | 118,362  |   
|                                                                                    |  |               |          |      |  |          |   
|Net cash provided by operating activities                                           |  |               | 136,576  |      |  | 142,529  |   
|                                                                                    |  |               |          |      |  |          |   
|Cash flows from investing
  activities                                              |  |               |          |      |  |          |   
|Acquisition of fixed assets                                                         |  |               | (102,357 | )    |  | (112,890 | ) 
|Proceeds from the sale of fixed assets                                              |  |               | 12,274   |      |  | 12,750   |   
|Proceeds from the sale of investments in 
     companies presented by equity method |  |               | -        |      |  | 20       |   
|Investments in long-term loans                                                      |  |               | (17,195  | )    |  | (53,267  | )*
|Collection of long-term loans                                                       |  |               | 73,460   |      |  | 29,574   |   
|Investments in other assets and deferred expenses                                   |  |               | (51,123  | )    |  | (33,365  | ) 
|Acquisition of affiliated companies shares                                         |  |               | (646     | )    |  | (1,617   | )*
|Sale of marketable securities, net                                                  |  |               | 19,436   |      |  | 2,594    |   
|Investments in companies carried at cost                                            |  |               | (77      | )    |  | (72      | ) 
|Acquisition of subsidiarys shares                                                  |  |               | -        |      |  | (17,423  | ) 
|Investment in capital note of affiliated company                                    |  |               | -        |      |  | (6,114   | ) 
|Acquisition of initially consolidated companies(B)                                  |  |               | 138      |      |  | (2,434   | ) 
|Proceeds from the sale a previously consolidated 
     company (C)                  |  |               | -        |      |  | (5,480   | ) 
|                                                                                    |  |               |          |      |  |          |   
|Net cash used in investing activities                                               |  |               | (66,090  | )    |  | (187,724 | ) 
|                                                                                    |  |               |          |      |  |          |   
|Cash flows from financing
  activities                                              |  |               |          |      |  |          |   
|Dividend paid                                                                       |  |               | (77,161  | )    |  | -        |   
|Dividend to minority shareholders in subsidiaries                                   |  |               | (555     | )    |  | (893     | ) 
|Short-term credit from banks and others, net                                        |  |               | 107,946  |      |  | (221,810 | ) 
|Receipt of long-term loans                                                          |  |               | 10,492   |      |  | 371,277  |   
|Repayment of long-term loans                                                        |  |               | (137,298 | )    |  | (85,629  | ) 
|Deposits received from customers                                                    |  |               | 2,170    |      |  | 1,452    |   
|Deposits refunded to customers                                                      |  |               | (1,850   | )    |  | (873     | ) 
|Repayment of debentures                                                             |  |               | -        |      |  | (14,249  | ) 
|Acquisition of Companys shares by subsidiary                                       |  |               | -        |      |  | (5,838   | ) 
|Proceeds from the issuance (redemption)  of 
  
     capital note                   |  |               | -        |      |  | (615     | ) 
|                                                                                    |  |               |          |      |  |          |   
|Net cash (provided by) used for  financing activities                               |  |               | (96,256  | )    |  | 42,822   |   
|                                                                                    |  |               |          |      |  |          |   
|(Decrease) increase in cash and cash equivalents                                    |  |               | (25,770  | )    |  | (2,373   | ) 
|Cash and cash equivalents at beginning of year                                      |  |               | 33,249   |      |  | 35,622   |   
|                                                                                    |  |               |          |      |  |          |   
|Cash and cash equivalents at end of year                                            |  |               | 7,479    |      |  | 33,249   | * 
|                                                                                    |  |               |          |      |  |          |   

* Reclassified

The notes to the
financial statements are an integral part thereof.

-8-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

|Consolidated statements of cash
  flows for the year ended December 31
|----------------------------------------------------------------------
|                                                                      
|Adjusted to NIS of December 2003                                      

|    |                                                                                                                                |  | 2003          |         | 2002 |  | 2001    |   
|--- | ------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ------- | ---- |  | ------- | --
|    |                                                                                                                                |  |               |         |      |  |         |   
|    |                                                                                                                                |  | NIS Thousands |        
|    |                                                                                                                                |  |               |        
|(A) | Reconciliations required to present
  cash flows from 
  operating activities                                                  |  |               |         |      |  |         |   
|    | Income and expenses not requiring
  cash flows                                                                                 |  |               |         |      |  |         |   
|    | Depreciation and amortization, net                                                                                             |  |               | 128,820 |      |  | 118,773 |   
|    | Deferred taxes, net                                                                                                            |  |               | (31,396 | )    |  | (10,987 | )*
|    | (Decrease) increase in liabilities for severance
  pay, net                                                                    |  |               | (7,478  | )    |  | (8,527  | ) 
|    | Minority interest in income of subsidiaries                                                                                    |  |               | 914     |      |  | 2,268   |   
|    | Groups 
  share in undistributed losses of affiliated 
  companies, net                                                       |  |               | 17,492  |      |  | 6,597   |   
|    | Capital (gains) losses                                                                                                         |  |               | (1,408  | )    |  | 9,404   |   
|    | Erosion of long-term loans, debentures and capital 
  notes issued                                                             |  |               | 5,044   |      |  | (8,983  | ) 
|    | Erosion of loans granted                                                                                                       |  |               | (267    | )    |  | (5,346  | ) 
|    | (Increase) decrease in value of marketable
  securities, net                                                                   |  |               | (5,098  | )    |  | 8,143   |   
|    | Erosion and write-off of customers deposits                                                                                    |  |               | (3,268  | )    |  | (3,835  | ) 
|    | Decrease in value of investments in affiliated
  company 
  and other companies, net                                           |  |               | 3,347   |      |  | 20,014  |   
|    | Decrease in value of fixed assets                                                                                              |  |               | 35,480  |      |  | -       |   
|    | Gain from decrease in percent ownership in an
  affiliated 
  company                                                          |  |               | -       |      |  | (629    | ) 
|    | Loss (profit) from the sale of  investments in subsidiary                                                                      |  |               | -       |      |  | 21      |   
|    | Changes in assets and liabilities:                                                                                             |  |               |         |      |  |         |   
|    | Decrease (increase) in trade receivables, notes and 
  long-term checks for collection and receivables for 
  work in progress |  |               | 26,199  |      |  | (74,520 | )*
|    | Decrease (increase) in other receivables                                                                                       |  |               | 17,912  |      |  | (23,462 | ) 
|    | Decrease (increase) in inventories and non-current 
  inventories                                                              |  |               | 24,542  |      |  | 68,343  |   
|    | Increase (decrease) in trade payables                                                                                          |  |               | 939     |      |  | 20,530  | * 
|    | Increase (decrease) in other payables                                                                                          |  |               | 20,848  |      |  | 558     |   
|    |                                                                                                                                |  |               |         |      |  |         |   
|    |                                                                                                                                |  |               | 232,622 |      |  | 118,362 |   
|    |                                                                                                                                |  |               |         |      |  |         |   
|(B) | Acquisition of initially
  consolidated companies                                                                              |  |               |         |      |  |         |   
|    | Working capital (excluding cash and cash
  equivalents)                                                                        |  |               | 19,216  |      |  | (3,363  | ) 
|    | Fixed assets                                                                                                                   |  |               | (17,431 | )    |  | (1,384  | ) 
|    | Long-term liabilities, net                                                                                                     |  |               | -       |      |  | 15      |   
|    | Investment in affiliated company                                                                                               |  |               | (1,647  | )    |  | 2,812   |   
|    | Goodwill created at the time of acquisition                                                                                    |  |               | -       |      |  | (514    | ) 
|    | Minority rights on the date of the acquisition                                                                                 |  |               | -       |      |  | -       |   
|    |                                                                                                                                |  |               |         |      |  |         |   
|    |                                                                                                                                |  |               | 138     |      |  | (2,434  | ) 
|    |                                                                                                                                |  |               |         |      |  |         |   
|(C) | Proceeds from the sale of
  investment in a previously 
  consolidated company                                                 |  |               |         |      |  |         |   
|    | Working capital (excluding cash and cash
  equivalents)                                                                        |  |               | -       |      |  | (7,314  | ) 
|    | Fixed and other assets                                                                                                         |  |               | -       |      |  | 2,526   |   
|    | Long-term (liabilities) receivables, net                                                                                       |  |               | -       |      |  | (343    | ) 
|    | Goodwill                                                                                                                       |  |               | -       |      |  | -       |   
|    | Minority rights on date of sale                                                                                                |  |               | -       |      |  | (328    | ) 
|    | Capital (loss) gain from sale of investment in
  subsidiary                                                                    |  |               | -       |      |  | (21     | ) 
|    |                                                                                                                                |  |               |         |      |  |         |   
|    | Proceeds from sale of subsidiary                                                                                               |  |               | -       |      |  | (5,480  | ) 
|    |                                                                                                                                |  |               |         |      |  |         |   
|    | * Reclassified                                                                                                                 |  |               |         |      |  |         |   

The
notes to the financial statements are an integral part thereof.

-9-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

|Consolidated statements of cash
  flows for the year ended December 31
|----------------------------------------------------------------------
|                                                                      
|Adjusted to NIS of December 2003                                      

(D)     Non-cash
items:

|                                                     |  | 2003          |        | 2002 |  | 2001   | 
|---------------------------------------------------- |  | ------------- | ------ | ---- |  | ------ | 
|                                                     |  |               |        |      |  |        | 
|                                                     |  | NIS Thousands |       
|                                                     |  |               |       
|                                                     |  |               |        |      |  |        | 
|Conversion of trade receivables to long-term loans   |  |               | 13,294 |      |  | 16,823 | 
|                                                     |  |               |        |      |  |        | 
|                                                     |  |               |        |      |  |        | 
|Acquisition of fixed assets against suppliers credit |  |               | 2,247  |      |  | 356    | 
|                                                     |  |               |        |      |  |        | 
|                                                     |  |               |        |      |  |        | 
|Acquisition of other assets on credit                |  |               | -      |      |  | 3,775  | 
|                                                     |  |               |        |      |  |        | 
|                                                     |  |               |        |      |  |        | 
|Minority interest in dividend declared by subsidiary |  |               | -      |      |  | 65     | 
|                                                     |  |               |        |      |  |        | 

The notes to the
financial statements are an integral part thereof.

-10-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

|Note 1 - | General                                                                                                                                                         
|-------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                 
|A.       | Granite Hacarmel Investments Ltd. (hereinafter: the
  Company) (Public Company 520037177) and its subsidiaries are engaged mainly
  in the following branches:
|         |                                                                                                                                                                 
|         | 1.                                                                                                                                                              
|         |                                                                                                                                                                 
|         | 2.                                                                                                                                                              
|         |                                                                                                                                                                 
|         | 3.                                                                                                                                                              
|         |                                                                                                                                                                 
|         | 4.                                                                                                                                                              
|         |                                                                                                                                                                 
|         | 5.                                                                                                                                                              
|         |                                                                                                                                                                 
|B.       | In these financial statements -                                                                                                                                 
|         |                                                                                                                                                                 
|         | 1.                                                                                                                                                              
|         |                                                                                                                                                                 
|         | 2.                                                                                                                                                              
|         |                                                                                                                                                                 
|         | 3.                                                                                                                                                              
|         |                                                                                                                                                                 
|         | 4.                                                                                                                                                              
|         |                                                                                                                                                                 
|         | 5.                                                                                                                                                              
|         |                                                                                                                                                                 
|         | 6.                                                                                                                                                              
|         |                                                                                                                                                                 
|         | 7.                                                                                                                                                              
|         |                                                                                                                                                                 
|         | 8.                                                                                                                                                              
|         |                                                                                                                                                                 
|         | 9.                                                                                                                                                              

-11-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

|Note 2 - | Reporting
  rules and accounting principles
|-------- | -------------------------------------------

|A. | Principles
  of adjustment and consolidation of financial statements
|-- | --------------------------------------------------------------------
|   |                                                                     
|   | 1.                                                                  
|   |                                                                     
|   |                                                                     
|   |                                                                     
|   |                                                                     
|   |                                                                     
|   |                                                                     
|   |                                                                     
|   |                                                                     
|   |                                                                     
|   | 2.                                                                  
|   |                                                                     
|   |                                                                     
|   |                                                                     
|   |                                                                     
|   |                                                                     
|   |                                                                     
|   |                                                                     
|   |                                                                     
|   |                                                                     

-12-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

|Note 2 - | Reporting
  rules and accounting principles (contd.)
|-------- | ----------------------------------------------------

|A. | Principles
  of adjustment and consolidation of financial statements (contd.)
|-- | -----------------------------------------------------------------------------
|   |                                                                              
|   | 3.                                                                           
|   |                                                                              
|   |                                                                              
|   |                                                                              
|   |                                                                              
|   |                                                                              
|   |                                                                              
|   |                                                                              
|   |                                                                              
|   |                                                                              
|   |                                                                              
|   |                                                                              
|   |                                                                              
|   |                                                                              
|   | 4.                                                                           
|   |                                                                              
|   |                                                                              

-13-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

|Note 2 - | Reporting
  rules and accounting principles (contd.)
|-------- | ----------------------------------------------------

|A. | Principles
  of adjustment and consolidation of financial statements(contd.)
|-- | ----------------------------------------------------------------------------
|   |                                                                             
|   | 5.                                                                          
|   |                                                                             
|   |                                                                             
|   |                                                                             
|   |                                                                             
|   |                                                                             
|   |                                                                             
|   |                                                                             
|   |                                                                             
|   |                                                                             
|   |                                                                             
|   |                                                                             
|   |                                                                             
|B. | Investments in Companies                                                    
|   |                                                                             
|   | 1.                                                                          
|   |                                                                             
|   |                                                                             
|   |                                                                             

-14-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

|Note 2 - | Reporting
  rules and accounting principles (contd.)
|-------- | ----------------------------------------------------

|B. | Investments in Companies  (contd.)
|-- | ----------------------------------
|   |                                   
|   | 1.                                
|   |                                   
|   |                                   
|   |                                   
|   |                                   
|   |                                   
|   |                                   
|   |                                   
|   |                                   
|   |                                   
|   |                                   
|   | 2.                                
|   |                                   
|   |                                   
|C. | Valuation of Inventories          
|   |                                   
|   | 1.                                
|   |                                   
|   |                                   
|   |                                   
|   |                                   

-15-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

|Note 2 - | Reporting
  rules and accounting principles (contd.)
|-------- | ----------------------------------------------------

|C. | Valuation of Inventories (contd.)                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|D. | Fixed assets                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Fixed assets are presented at cost less accumulated
  depreciation (cost  plus excess costs relating to specific assets).
  Improvements and refinements are charged to the cost of the assets while
  maintenance expenses and repairs are charged as incurred to the statement of
  income. Depreciation is calculated by the straight line method at annual
  rates based on their estimated useful lives. 
  Capitalization of credit costs  see Note 2(n) below.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Annual rates of depreciation are:                                                                                                                                                                                                                                                                                                                                                                                                                                      

| |                                                                         |  | % |                                                                                
| | ----------------------------------------------------------------------- |  | - | -------------------------------------------------------------------------------
| |                                                                         |  |   |                                                                                
| | Buildings (including temporary buildings
    and buildings for leasing) |  |   | 2-10                                                                           
| | Machinery and equipment                                                 |  |   | 5-33                                                                           
| | Vehicles                                                                |  |   | 15-20                                                                          
| | Computers                                                               |  |   | 20-33                                                                          
| | Office furniture and equipment                                          |  |   | 6-20                                                                           
| | Leasehold improvements                                                  |  |   | over the period of lease which does not exceed the
  economic life of the asset
| |                                                                         |  |   |                                                                                

| | Excess costs relating to specific assets are
  depreciated according to the estimated balance of the period of use of the
  assets to which they relate.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | Amortization of leasehold rights are over the period
  of the lease.                                                                                    
| | Depreciation of buildings on leased land is over the
  period of the lease.                                                                             

-16-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

|Note 2 - | Reporting
  rules and accounting principles (contd.)
|-------- | ----------------------------------------------------

|E. | Other assets                                                                                                                                                 
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                              
|   | Other assets are presented at cost and amortized at
  annual rates from the start of their utilization as follows:                                           
|   | Deferred rental  over the period of the lease at
  equal annual rates.                                                                                      
|   | Goodwill  see Note 2(a)(5).                                                                                                                                 
|   | Distribution rights  over 20 years or according to
  the period of the agreement.                                                                           
|   | Delivery 
  rights  over 10 years or according to the period of agreement.                                                                                  
|   | Others over the period of the expected benefit.                                                                                                             
|   |                                                                                                                                                              
|F. | Foreign currency and linkage                                                                                                                                 
|   |                                                                                                                                                              
|   | Assets (excluding securities) and liabilities in
  foreign currency or linked to it, are included at rates of exchange in effect
  on the balance sheet date.
|   | Assets (excluding securities) and liabilities linked
  to the consumer price index are included according to the linkage terms
  applying to each balance.   
|   |                                                                                                                                                              
|   | Data on the consumer price index and rates of
  exchange:                                                                                                    

| |                                                        |  | Dec. 31,
  2003 |        | Dec. 31,
  2002 |  | Dec. 31,
  2001 |  | %
  change
  2003 |       | %
  change
  2002 |  | %
  change
  2001 |  
| | ------------------------------------------------------ |  | --------------- | ------ | --------------- |  | --------------- |  | ----------------- | ----- | ----------------- |  | ----------------- | -
| |                                                        |  |                 |        |                 |  |                 |  |                   |       |                   |  |                   |  
| |                                                        |  |                 |        |                 |  |                 |  |                   |       |                   |  |                   |  
| | Consumer price index-                                  |  |                 |        |                 |  |                 |  |                   |       |                   |  |                   |  
| | In points                                              |  |                 | 112.95 |                 |  | 115.12          |  |                   | 108.1 |                   |  | (1.9              | )
| |                                                        |  |                 |        |                 |  |                 |  |                   |       |                   |  |                   |  
| | Representative rate of 
  exchange of the US 
  dollar |  |                 | 4.379  |                 |  | 4.737           |  |                   | 4.416 |                   |  | (7.6              | )

|G. | Marketable securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Marketable securities held as short term investments
  are presented on the basis of their 
  realizable value on the stock exchange as of the balance sheet date.                                                                                                                                                                                                                                                                                                                                              
|   | Marketable securities which are permanent
  investments are presented at cost less a provision for a decline in their
  value which is other than a temporary nature (see also Note 2(b)(2) above).                                                                                                                                                                                                                                                                                                             
|   | Changes in the value of securities are fully
  reflected in the statement of income.                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|H. | Provision for doubtful debts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The financial statements include a provision for
  doubtful debts which adequately reflect, according to managements
  evaluation, the loss inherent in debts whose collection is in doubt.  The provision for doubtful debts includes
  specific provisions. Management, in determining the adequacy of provisions,
  considered, inter alia, information available regarding the financial
  condition of customers, the extent of their operations and an evaluation of
  the collateral received from them.

-17-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

|Note 2 - | Reporting
  rules and accounting principles (contd.)
|-------- | ----------------------------------------------------

|I. | Deferred taxes                                                                                                                                                                                                                                                                                                                                          
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                         
|   | The companies in the Group apportion taxes as a
  result of temporary differences. Temporary differences are differences
  between the value for tax purposes of assets and liabilities and their book
  value.  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 (asset or liability)
  is calculated by the liability method at tax rates which are expected to be
  in effect when the deferred taxes will be utilized, using tax rates and tax
  laws which were legislated or whose legislation was completed as of the
  balance sheet date.                                          
|   | The main factors in respect of which deferred taxes
  have not been calculated are:                                                                                                                                                                                                                                                                     
|   | 1.                                                                                                                                                                                                                                                                                                                                                      
|   | 2.                                                                                                                                                                                                                                                                                                                                                      
|   | 3.                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                         
|J. | Recognition of revenues                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                         
|   | 1.                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                         
|   | 2.                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                         
|   | 3.                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                         

-18-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

|Note 2 - | Reporting
  rules and accounting principles (contd.)
|-------- | ----------------------------------------------------

|K. | Provision for linkage differences
  on customers deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Supergas, a subsidiary, is obligated by law to pay
  customers who terminate their gas purchasing agreement  an amount equal to the latest approved
  deposit authorized by the Ministry of Industry and Trade, plus linkage
  differences from the date of the last approval until the actual payment date.
  The liability, included on the basis of the present value is determined
  according to the actual liability as mentioned above.  The provision for this liability is made
  on a present value basis.                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|L. | Earnings per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Earnings per share is calculated in accordance with
  Pronouncement 55 of the Institute of Certified Public Accountants in Israel.                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | In calculating the primary
  earnings per share, the convertible securities issued by the Company were
  taken into account if there is a likelihood of their conversion or
  realization in accordance with the tests set forth in the Pronouncement.                                                                                                                                                                                                                                                                                                                      
|   | In calculating diluted
  earnings per share, convertible securities issued by the Company and its
  investee companies which were not included in calculating the primary
  earnings per share were taken into account, provided that their conversion or
  realization does not result in an increase in earnings per share
  (anti-dilutive effect).                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|M. | Use of
  estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | In preparing the financial
  statements in accordance with generally accepted accounting principles,
  management applies estimates and evaluations 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.                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|N. | Capitalization
  of credit costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The Company capitalizes
  credit costs in accordance with Accounting Standard No. 3 which relates to
  capitalization of credit costs. 
  According to this Standard, specific credit costs and non-specific
  credit costs should be capitalized to eligible assets.  The credit costs which are non-specific
  are capitalized to that investment or that part of it which was not financed
  by specific credit, while applying a rate which is a weighted average of the
  cost for those sources of financing whose costs were not capitalized on a
  specific basis.

-19-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

|Note 2 - | Reporting
  rules and accounting principles (contd.)
|-------- | ----------------------------------------------------

|O. | Presentation
  of transactions between the Company and a controlling party                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | Transactions between the
  Company and a controlling party in the Company are presented according to the
  Securities Regulations (Presentation of Transactions between a Company and a
  Controlling Party in the Financial Statements)  1996.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|P. | Derivative
  financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Forward currency
  transactions  derivative financial instruments not for hedging purposes are
  presented in the balance sheet at their fair value.  Changes in fair value are posted to the financing item in the
  statement of income.  Results of
  derivative financial instruments which are intended for hedging are posted to
  the statement of income concurrently with posting the results of the hedged
  item.                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Q. | Decline
  in value of assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The Company adopted
  Accounting Standard No. 15  Decline in the Value of Assets (hereinafter:
  the Standard).  The Standard sets
  forth procedures which the Company must implement in order to ensure that the
  assets in its consolidated balance sheet (to which the Standard applies),
  will not be presented at an amount exceeding their recoverable value, which
  is the higher of the net selling price and the usage value (the present value
  of the expected cash flows expected to result from the use of an asset and
  its realization).                                                                                                                                                                                                                                                                                
|   | The Standard applies to
  all assets in the consolidated balance sheet excluding tax assets and
  monetary assets (apart from monetary assets which are investments in investee
  companies that are not subsidiaries).  In addition the Standard
  stipulates the rules of presentation and disclosure regarding assets whose
  value declined.  Where the value of an
  asset in the consolidated balance sheet exceeds its recoverable amount,  the Company recognizes a loss from the
  decline in the value in the amount of the difference between the book value
  of the asset and its recoverable amount. The loss recognized will be
  cancelled only if there are changes in the estimates used in determining the
  recoverable amount of the asset from the last date in which the loss from the
  decline in value was recognized.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | In September 2003, the
  Israeli Accounting Standards Board published Clarification No. 1 regarding
  the accounting treatment for a decline in the value of an investment in an
  investee company which is not a subsidiary (hereinafter: the
  Clarification). The Clarification stipulates that during periods subsequent
  to the period in which the provision for the decline in the value of an
  investee company which is not a subsidiary was first recorded, the investment
  in the investee company must be presented at the lower of the recoverable
  amount and the amount of the investment using the equity method, where the
  recoverable amount is calculated for every reporting period in which there
  are indications that there is a change in the recoverable amount.                                             

-20-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

|Note 2 - | Reporting
  rules and accounting principles (contd.)
|-------- | ----------------------------------------------------

|R. | Environmental costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Current operating 
  and maintenance costs of facilities used  to prevent pollution of the environment and expected provisions
  for costs relating to restoring the environment, resulting from current
  operations or past operations, are charged to the statement of income. The
  costs of establishing facilities to prevent environmental pollution, which
  increase the life or efficiency of a facility or reduce or prevent
  environmental pollution, are charged to the cost of the fixed assets and
  depreciated according to the depreciation policy of the Company.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|S. | Disclosure of the effects of new
  accounting standards during the period prior to their implementation                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

-21-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

Note 2 -    Reporting rules and accounting principles
(contd.)

|T.                                             | Disclosure of effects of new
  accounting standards during the period prior to their implementation (contd.)                                                              
|---------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                               |                                                                                                                                                                           
|                                               | 3.                                                                                                                                                                        
|                                               |                                                                                                                                                                           
|                                               |                                                                                                                                                                           
|                                               |                                                                                                                                                                           
|                                              
|Note 3 -
    Consolidated financial statements
|                                              
|Initially
  consolidated companies            
|                                               |                                                                                                                                                                           
|                                               | During the current year
  the financial statements of Kleeson Holdings (1999) Ltd. were consolidated
  for the first time.                                                
|                                               |                                                                                                                                                                           
|                                               | Following are amounts
  included in the consolidated financial statements (prior to the increase in
  the rate of holding the company was presented by the equity method).

| |                                                                     |  | Date ofacquisition ofcontrol |         | December
  31, 2003and the period fromthe acquisition up tothe above date | 
| | ------------------------------------------------------------------- |  | ---------------------------- | ------- | ------------------------------------------------------------------------- | 
| |                                                                     |  |                              |         |                                                                           | 
| |                                                                     |  | NIS
  thousands              |        
| |                                                                     |  |                              |        
| | Balance
  sheet                                                     |  |                              |         |                                                                           | 
| | Cash
  and cash equivalents                                         |  |                              | 138     |                                                                           | 
| | Working
  capital (excluding cash and
       cash equivalents), net |  |                              | (19,216 | )                                                                         | 
| | Fixed
  assets, after deducting accumulated
          depreciation  |  |                              | 17,431  |                                                                           | 
| | Investment
  in affiliated company                                  |  |                              | (1,647  | )                                                                         | 
| |                                                                     |  |                              |         |                                                                           | 
| | Statement
  of income                                               |  |                              |         |                                                                           | 
| | Expenses
  and costs                                                |  |                              | -       |                                                                           | 

-22-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

|Note 4 - | Accounting
  with the Fuel Authority and government control in the energy sector  Sonol
|-------- | ----------------------------------------------------------------------------------------

|1. | Amounts due to or from the Fuel Authority, the
  government agency responsible for supervision of the fuel market in Israel,
  to the extent still provisional, are included in the accounts each year
  according to estimates prepared by Sonol Israel Ltd.s management
  (hereinafter: Sonol), a subsidiary, based on past experience.  Differences arising as a result of changes
  in the estimates are reflected in the results of the period of account in
  which they are determined.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2. | All the costs and expenses related to  the holding of Security inventories, are
  fully recoverable from the government. Costs of holding Commercial
  inventories are on Sonols account with all the attendant risks.                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|3. | The sales prices of 95 and 96 octane gasoline at the
  public filling stations are subject to government control.                                                                                                                                                                                                                                                                                                                                                                                

Note 5 
  Cash and cash equivalents

Consist of:

|                      |  | December
  31   |      
|--------------------- |  | --------------- | -----
|                      |  |                 |      
|                      |  | 2003            |      
|                      |  |                 |      
|                      |  | NIS
  thousands |      
|                      |  |                 |      
|In local currency     |  |                 | 5,637
|In foreign currency** |  |                 | 1,842
|                      |  |                 |      
|                      |  |                 | 7,479
|                      |  |                 |      

Cash equivalents  bank
deposits, whose maturities at the time of the deposit, did not exceed 3 months.

*   Reclassified
** Mainly in US dollars.

-23-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

Note 6 
  Trade and other receivables

Consist of:

|    |                                                 |  | December
  31   |         
|--- | ----------------------------------------------- |  | --------------- | --------
|    |                                                 |  |                 |         
|    |                                                 |  | 2003            |         
|    |                                                 |  |                 |         
|    |                                                 |  | NIS
  thousands |         
|    |                                                 |  |                 |         
|(1) | Trade
  receivables:                            |  |                 |         
|    | Customers
   open accounts                     |  |                 | 714,253 
|    | Income
  receivable                             |  |                 | 19,800  
|    | Checks
  and notes receivable                   |  |                 | 204,622 
|    | Credit
  card companies                         |  |                 | 100,115 
|    | Current
  maturities of long-term loans granted |  |                 | 30,204  
|    | Less
  provision for doubtful debts             |  |                 | (103,380
|    |                                                 |  |                 |         
|    |                                                 |  |                 | 965,614 
|    |                                                 |  |                 |         
|(2) | Other
  receivables:                            |  |                 |         
|    | Fuel
  Authority                                |  |                 | 4,212   
|    | Government
  agencies                           |  |                 | 424     
|    | Income
  receivable                             |  |                 | 963     
|    | Income
  tax receivable                         |  |                 | 4,383   
|    | Employees                                       |  |                 | 1,188   
|    | Prepaid
  expenses                              |  |                 | 10,435  
|    | Deferred
  taxes, net**                         |  |                 | 33,896  
|    | Current
  maturities of long-term receivables   |  |                 | -       
|    | Others                                          |  |                 | 16,236  
|    |                                                 |  |                 |         
|    |                                                 |  |                 | 71,737  
|    |                                                 |  |                 |         
|(3) | Receivables
  for work in progress:             |  |                 |         
|    | Income
  receivable                             |  |                 | 62,114  
|    | Less
  receipts on account of work in progress  |  |                 | 47,671  
|    |                                                 |  |                 |         
|    |                                                 |  |                 | 14,443  
|    |                                                 |  |                 |         
|(4) | For credit risks see Note
  28e.                |  |                 |         
|    |                                                 |  |                 |         
|    | *   Reclassified                                |  |                 |         
|    | ** See Note 26                                  |  |                 |         

Note 7 
  Inventories

Consist of:

| |                                         |                                                    | December 31     |        
| | --------------------------------------- | -------------------------------------------------- | --------------- | -------
| |                                         |                                                    |                 |        
| |                                         |                                                    | 2003            |        
| |                                         |                                                    |                 |        
| |                                         |                                                    | NIS
  thousands |        
| |                                         |                                                    |                 |        
| |                                         |                                                    |                 |        
| | Crude oil and raw
  materials           |                                                    |                 | 48,184 
| | Finished goods                          |                                                    |                 | 234,055
| | Auxiliary materials                     |                                                    |                 | 12,933 
| | Goods in process                        |                                                    |                 | 6,574  
| | Inventory of work in
  process, net (1) |                                                    |                 | 5,077  
| |                                         |                                                    |                 |        
| |                                         |                                                    |                 | 306,823
| | Less non-current
  inventories (2)      |                                                    |                 | 110,981
| |                                         |                                                    |                 |        
| |                                         |                                                    |                 | 195,842
| |                                         |                                                    |                 |        
| |                                         |                                                    |                 |        
| |                                         |                                                    |                 |        
| | (1)                                     | Inventory of work in
  process                     |                 |        
| |                                         | Less amount reflected in
  the statement of income |                 |        
| |                                         |                                                    |                 |        
| |                                         |                                                    |                 | 5,077  
| |                                         |                                                    |                 |        
| | (2)                                     | See Note 2.c.1                                     |                 |        

-24-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

Note 8 
  Investee companies and other investments

| |                                                                                      |  | December
  31   |        
| | ------------------------------------------------------------------------------------ |  | --------------- | -------
| |                                                                                      |  |                 |        
| |                                                                                      |  | 2003            |        
| |                                                                                      |  |                 |        
| |                                                                                      |  | NIS
  thousands |        
| |                                                                                      |  |                 |        
| | Affiliated
  companies and others:                                                   |  |                 |        
| |                                                                                      |  |                 |        
| | Investments in affiliated
  companies                                                |  |                 |        
| |                                                                                      |  |                 |        
| | Balance of investments as
  at December 31, 1991                                     |  |                 | 12,575 
| |                                                                                      |  |                 |        
| | Changes as of January 1,
  1992:                                                     |  |                 |        
| | Cost of shares**                                                                     |  |                 | 146,693
| | Share in accumulated net
  losses                                                    |  |                 | (47,814
| | Write-down of investment                                                             |  |                 | (15,152
| | Long-term loans to
  affiliated companies (1)                                        |  |                 | 11,261 
| | Investment in capital
  notes of affiliated company (2)                              |  |                 | 6,936  
| | Classification to current
  assets (3)                                               |  |                 | (12,516
| | Presented in reserve for
  losses                                                    |  |                 | 1,530  
| |                                                                                      |  |                 |        
| |                                                                                      |  |                 | 103,513
| | Investment in shares on
  the cost basis after write down to
  recoverable value (4) |  |                 | 26,991 
| |                                                                                      |  |                 |        
| |                                                                                      |  |                 | 130,504
| |                                                                                      |  |                 |        
| |                                                                                      |  |                 |        
| | *   Reclassified                                                                     |  |                 |        
| | ** Including goodwill not
  yet fully amortized:                                     |  |                 |        
| |                                                                                      |  |                 |        
| | Original
  amount                                                                    |  |                 | 16,281 
| |                                                                                      |  |                 |        
| | Balance                                                                              |  |                 | 10,150 
| |                                                                                      |  |                 |        
| |                                                                                      |  |                 |        
| | Securities
  listed for trading on the Tel Aviv Stock Exchange:                      |  |                 |        
| |                                                                                      |  |                 |        
| | Affiliated companies:                                                                |  |                 |        
| |                                                                                      |  |                 |        
| | Book value                                                                           |  |                 | 75,437 
| |                                                                                      |  |                 |        
| | Stock exchange value                                                                 |  |                 | 28,381 
| |                                                                                      |  |                 |        
| |                                                                                      |  |                 |        
| | Companies at cost:                                                                   |  |                 |        
| |                                                                                      |  |                 |        
| | Book value                                                                           |  |                 | 3,369  
| |                                                                                      |  |                 |        
| | Stock exchange value                                                                 |  |                 | 7,580  
| |                                                                                      |  |                 |        

|(1) | The loans are index linked
  and bear interest at the rate of 0%-10% with no due date but not prior to
  January 1, 2005.   
|--- | ----------------------------------------------------------------------------------------------------------------------------
|(2) | Permanent capital notes
  issued by a limited partnership are unlinked and non-interest bearing.                            
|(3) | In January 2004, after
  signing MOU at December 2003, a subsidiary sold all its holdings in an
  affiliated company.       
|(4) | In 2003 a provision for a
  decline in the value of the investments of NIS 5,266 thousand was
  included.  See also Note 25.

-25-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

Note 8 
  Investee companies and other investments (contd.)

Changes in investment in affiliated companies:

| |                                                                                        |  | NIS
  thousands |  
| | -------------------------------------------------------------------------------------- |  | --------------- | -
| |                                                                                        |  |                 |  
| |                                                                                        |  |                 |  
| | Balance as at January 1,
  2003                                                        |  | 128,233         |  
| | Changes during the year:                                                               |  |                 |  
| | Investment in shares                                                                   |  | 646             |  
| | Investment in capital
  notes                                                          |  | 822             |  
| | Repayment of loans, net                                                                |  | (1,131          | )
| | Initial consolidation of
  former affiliated company (See Note 3)                      |  | 1,647           |  
| | Share in losses, net                                                                   |  | (17,189         | )
| | Reclassification of
  writedown of investment in affiliated company
  to equity losses |  | 1,919           |  
| | Dividend during the year
  of report                                                   |  | (303            | )
| | Reclassification to
  current assets                                                   |  | (12,516         | )
| | Changes in reserve for the
  losses                                                    |  | 1,385           |  
| |                                                                                        |  |                 |  
| |                                                                                        |  |                 |  
| | Balance as at December 31,
  2003                                                      |  | 103,513         |  
| |                                                                                        |  |                 |  

-26-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

Note 9 
  Loans and long-term receivables

|A. | In consolidated balance sheet
  comprised as follows:
|-- | -----------------------------------------------------

|                                                |  | December
  31   |        
|----------------------------------------------- |  | --------------- | -------
|                                                |  | 2003            |        
|                                                |  |                 |        
|                                                |  | NIS
  thousands |        
|                                                |  |                 |        
|                                                |  |                 |        
|Loans to customers (1)                          |  |                 | 141,910
|Other loans                                     |  |                 | 5,390  
|                                                |  |                 |        
|                                                |  |                 | 147,300
|Less current maturities                         |  |                 | 30,204 
|                                                |  |                 |        
|                                                |  |                 | 117,096
|                                                |  |                 |        
|                                                |  |                 |        
|Other receivables (2)                           |  |                 | -      
|Checks and notes for
  collection               |  |                 | 12,741 
|Less current maturities                         |  |                 | -      
|                                                |  |                 |        
|                                                |  |                 | 12,471 
|                                                |  |                 |        
|                                                |  |                 | 129,837
|                                                |  |                 |        
|                                                |  |                 |        
|Dates of repayment of
  loans:                  |  |                 |        
|Current maturities                              |  |                 | 30,204 
|Second year                                     |  |                 | 21,253 
|Third year                                      |  |                 | 18,967 
|Fourth year                                     |  |                 | 10,825 
|Fifth year                                      |  |                 | 9,068  
|Sixth year and thereafter
  or without due date |  |                 | 56,983 
|                                                |  |                 |        
|                                                |  |                 | 147,300
|                                                |  |                 |        
|*  Reclassified                                 |  |                 |        

|(1) | December 31, 2003  less provision of NIS 1,624
  thousand for the difference between the interest stated in the loan and
  market interest on the date of granting the credit to the customer.                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Balance of long-term receivables in the Company from
  the sale of shares of an investee company. 
  According to the sales agreement, the balance of the debt that was
  linked to the consumer price index, was paid on April 22, 2003.  The discount rate of the balance of the
  debt in 2002 was 6%.

-27-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

Note 9 
  Loans and long-term receivables (contd.)

|B. | Breakdown
  of loans according to size of borrowers balances :
|-- | ---------------------------------------------------------------

| |                                       |  | December
  31, 2003 |    
| | ------------------------------------- |  | ------------------- | ---
| |                                       |  |                     |    
| | Borrowers balances of
  NIS thousands |  | Number of loans     |    
| |                                       |  |                     |    
| | Up to  1,000                          |  |                     | 125
| | From  1,000  10,000                  |  |                     | 43 
| | Over 10,000                           |  |                     | 2  
| |                                       |  |                     |    
| |                                       |  |                     | 170
| |                                       |  |                     |    

|   | A large part of the loans are covered by rental
  agreements and long-term supplier agreements in favor of companies in the
  Group and the companies have the right to offset amounts payable.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                
|C. | Linkage terms and interest rates on
  the loans:                                                                                                                                               

|                          |  | December
  31,  2003 | 
|------------------------- |  | -------------------- | 
|                          |  |                      | 
|                          |  | Unlinked             | 
|                          |  |                      | 
|Interest rates:           |  | 0%                   | 
|                          |  |                      | 
|                          |  | NIS
  thousands      | 
|                          |  |                      | 
|Loans to
  customers      |  | 6,335                | 
|Others                    |  | -                    | 
|                          |  |                      | 
|                          |  | 6,335                | 
|                          |  |                      | 
|Less current
  maturities |  |                      | 
|                          |  |                      | 
|                          |  |                      | 
|                          |  |                      | 

|D. | Regarding credit risks see Note 28.e.
|-- | -------------------------------------

-28-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

Note 10    Fixed assets

|a. | Consist
  of:
|-- | -------------

| |                                           |  | Land
  and
  buildings* |   | Machinery
  and
  equipment |   | Furniture,
  equipment and
  computers |   | Vehicles |   | Total     |  
| | ----------------------------------------- |  | ----------------------- | - | --------------------------- | - | -------------------------------------- | - | -------- | - | --------- | -
| |                                           |  |                         |   |                             |   |                                        |   |          |   |           |  
| |                                           |  | NIS
  thousands         |  
| |                                           |  |                         |  
| | Cost                                      |  |                         |   |                             |   |                                        |   |          |   |           |  
| | Balance at beginning
  of year            |  | 1,234,537               |   | 1,384,850                   |   | 166,216                                |   | 78,720   |   | 2,864,323 |  
| | Additions**                               |  | 55,275                  |   | 40,698                      |   | 12,936                                 |   | 7,391    |   | 116,300   |  
| | Disposals                                 |  | (7,173                  | ) | (3,121                      | ) | (766                                   | ) | (9,047   | ) | (20,107   | )
| |                                           |  |                         |   |                             |   |                                        |   |          |   |           |  
| | Balance at end of
  year                  |  | 1,282,639               |   | 1,422,427                   |   | 178,386                                |   | 77,064   |   | 2,960,516 |  
| |                                           |  |                         |   |                             |   |                                        |   |          |   |           |  
| | Accumulated
  depreciation                |  |                         |   |                             |   |                                        |   |          |   |           |  
| | Balance at beginning
  of year            |  | 455,402                 |   | 1,020,292                   |   | 115,594                                |   | 52,528   |   | 1,643,816 |  
| | Depreciation
  charged**                  |  | 30,979                  |   | 52,807                      |   | 18,763                                 |   | 7,300    |   | 109,849   |  
| | Depreciation on
  disposals               |  | (103                    | ) | (2,422                      | ) | (222                                   | ) | (6,631   | ) | (9,378    | )
| |                                           |  |                         |   |                             |   |                                        |   |          |   |           |  
| | Balance at end of
  year                  |  | 486,278                 |   | 1,070,677                   |   | 134,135                                |   | 53,197   |   | 1,744,287 |  
| |                                           |  |                         |   |                             |   |                                        |   |          |   |           |  
| | Provision for
  decline in value          |  |                         |   |                             |   |                                        |   |          |   |           |  
| | Losses from decline
  in value, net       |  | (29,752                 | ) | (3,013                      | ) | -                                      |   | -        |   | (32,765   | )
| | Withdrawals for
  assets sold             |  | 3,097                   |   | -                           |   | -                                      |   | -        |   | 3,097     |  
| |                                           |  |                         |   |                             |   |                                        |   |          |   |           |  
| | Balance at end of
  year                  |  | (26,655                 | ) | (3,013                      | ) | -                                      |   | -        |   | (29,668   | )
| |                                           |  |                         |   |                             |   |                                        |   |          |   |           |  
| | Depreciated balance
  as at Dec. 31, 2003 |  | 769,706                 |   | 348,737                     |   | 44,251                                 |   | 23,867   |   | 1,186,561 |  
| |                                           |  |                         |   |                             |   |                                        |   |          |   |           |  
| | Depreciated balance
  as at Dec. 31, 2002 |  | 779,135                 |   | 364,558                     |   | 50,622                                 |   | 26,192   |   | 1,220,507 |  
| |                                           |  |                         |   |                             |   |                                        |   |          |   |           |  

| | *   Including
  lesehold improvements 
  ** Including on behalf of an initially consolidated company (See Note 3).
| | ------------------------------------------------------------------------------------------------------------------

-29-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

Note 10 
  Fixed assets (contd.)_

|b. | Land and buildings include buildings on land leased
  by capital leasing at a cost of NIS 327,617 thousand for various original
  periods of 49-98 years ending in the years 2004-2072.  Land and buildings costing NIS 282,624
  thousand  have not yet been registered
  in the name of the Company or in subsidiaries in the Land Registry
  Office.  The main reason for the lack
  of registration is that the land settlement and subdivision procedures have
  not yet been completed.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Land and buildings include buildings on leased land
  and leasehold improvements to rented property having a cost of NIS 20,359
  thousand and a depreciated cost of NIS 10,365 thousand.  The terms of the leases were for original  periods of 4 to 25 years.                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|c. | Financing expenses of NIS 5,458 thousand for loans
  and credit used to finance the construction of  fixed assets were charged to the cost of these assets.                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|d. | Regarding collaterals see Note 28.                                                                                                                                                                                                                                                                                                                                                                                                                                                           

Note 11 
  Other assets
Consist of:

|                                                |  | Depreciated
  balance |        
|----------------------------------------------- |  | --------------------- | -------
|                                                |  |                       |        
|                                                |  | December
  31         |        
|                                                |  |                       |        
|                                                |  | 2003                  |        
|                                                |  |                       |        
|                                                |  | NIS
  thousands       |        
|                                                |  |                       |        
|Other
  assets                                  |  |                       |        
|Leasing and deferred rental                     |  |                       | 31,612 
|Goodwill in subsidiaries                        |  |                       | 15,035 
|Concessions for oil and gas exploration (1)     |  |                       | 915    
|Delivery and filling station operation
  rights |  |                       | 69,829 
|Distribution rights                             |  |                       | 19,431 
|Others (2)                                      |  |                       | 21,015 
|                                                |  |                       |        
|                                                |  |                       | 157,837
|Long-term deferred taxes (See Note
  26)        |  |                       | 51,212 
|                                                |  |                       |        
|                                                |  |                       | 209,049
|                                                |  |                       |        

|(1) | See also Notes 25 and 31.a.                       
|--- | --------------------------------------------------
|(2) | After writeoff in the amount of NIS 2,715 thousand
|    |                                                   
|*   | Reclassified                                      

-30-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

Note 12
  -  Credits from banks and other credit
provided
Details of linkage and interest rates:

|                                        |  | December
  31, 2003  |  | December
  31,2002                  | 
|--------------------------------------- |  | -------------------- |  | ----------------------------------- | 
|                                        |  |                      |  |                                     | 
|Interest rates                          |  | Unlinked
  5.7%-9.4% |  | Linked to
  the
  index
  4.6%-6.5% | 
|                                        |  |                      |  |                                     | 
|                                        |  | NIS
  thousands      |  | NIS
  thousands                     | 
|                                        |  |                      |  |                                     | 
|Overdrafts                              |  | 1,345                |  | -                                   | 
|Short-term loans                        |  | 922,812              |  | -                                   | 
|Current maturities of
  long-term loans |  | 22,752               |  | 194,314                             | 
|                                        |  |                      |  |                                     | 
|Total credit from banks                 |  | 946,909              |  | 194,314                             | 
|Credit from others                      |  | -                    |  | 1,034                               | 
|                                        |  |                      |  |                                     | 
|                                        |  | 946,909              |  | 195,348                             | 
|                                        |  |                      |  |                                     | 

-31-

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Financial Statements  December 31,
  2003                 
|                                                           

Note 13
  Trade payables

The
liabilities include NIS 2,932 thousand balances of related and interested
parties (2002  NIS 36,437 thousand).
Linkage terms  See Note 18.

Note 14    Other payables

Consist of:

|                                                                |  | December
  31   |        
|--------------------------------------------------------------- |  | --------------- | -------
|                                                                |  | 2003            |        
|                                                                |  |                 |        
|                                                                |  | NIS
  thousands |        
|                                                                |  |                 |        
|                                                                |  |                 |        
|Liabilities to employees
  and other salary related liabilities |  |                 | 41,757 
|Institutions                                                    |  |                 | 72,390 
|Accrued expenses                                                |  |                 | 44,860 
|Income tax payable                                              |  |                 | 19,131 
|Deferred taxes                                                  |  |                 | 868    
|Reserve for losses of
  affiliated companies                    |  |                 | 1,530  
|Others                                                          |  |                 | 15,252 
|                                                                |  |                 |        
|                                                                |  |                 |        
|                                                                |  |                 | 195,788
|                                                                |  |                 |        

---

---

|Granite Hacarmel Investments
  Limited and its Subsidiaries
|-----------------------------------------------------------
|                                                           
|Notes to the Financial Statements
  as at December 31, 2003
|                                                           

Note 15 
  Long-term liabilities

|a. | Long-term
  loans
|-- | -----------------

Consist of:

|                                                    |  |          |         | December
  31   |              
|--------------------------------------------------- |  | -------- | ------- | --------------- | -------------
|                                                    |  | Rate of  |         |                 |              
|                                                    |  | interest |         | 2003            |              
|                                                    |  |          |         |                 |              
|                                                    |  | %        |         | NIS
  thousands |              
|                                                    |  |          |         |                 |              
|                                                    |  |          |         |                 |              
|Loans
  from banks  index linked                   |  |          | 4.6-6.5 |                 |              
|Loans
  from banks  unlinked                       |  |          | 7.6     |                 |              
|Customers
  deposits  index linked                 |  |          | -       |                 |              
|Customers
  deposits  linked to foreign   currency |  |          | -       |                 |              
|Loans
  from banks  linked to foreign   currency   |  |          | 2.4     |                 |              
|Loans
  from others  index linked                  |  |          | 4.5     |                 |              
|Capital
  notes  unlinked                          |  |          | -       |                 |              
|                                                    |  |          |         |                 |              
|                                                    |  |          |         |                 |              
|Less
  current maturities                           |  |          |         |                 |              
|                                                    |  |          |         |                 |              
|                                                    |  |          |         |                 |              
|                                                    |  |          |         |                 |              
|                                                    |  |          |         |                 |              
|Maturity dates:                                     |  |          |         |                 |              
|                                                    |  |          |         |                 |              
|                                                    |  |          |         |                 | December 31  
|                                                    |  |          |         |                 |              
|                                                    |  |          |         |                 | 2003         
|                                                    |  |          |         |                 |              
|                                                    |  |          |         |                 | NIS thousands
|                                                    |  |          |         |                 |              
|                                                    |  |          |         |                 |              
|First
  year  current maturities                   |  |          |         |                 |              
|                                                    |  |          |         |                 |              
|                                                    |  |          |         |                 |              
|Second
  year                                       |  |          |         |                 |              
|Third
  year                                        |  |          |         |                 |              
|Fourth
  year                                       |  |          |         |                 |              
|Fifth
  year                                        |  |          |         |                 |              
|Sixth
  year and thereafter                         |  |          |         |                 |              
|Without
  due date                                  |  |          |         |                 |              
|                                                    |  |          |         |                 |              
|                                                    |  |          |         |                 |              
|                                                    |  |          |         |                 |              
|                                                    |  |          |         |                 |              
|                                                    |  |          |         |                 |              
|                                                    |  |          |         |                 |              

Accrued interest is included
in current liabilities in other payables.

*
Reclassified

-33-

---

---

|                                                           
|-----------------------------------------------------------
|Granite
  Hacarmel Investments Limited and its Subsidiaries
|                                                           
|Notes to
  the Financial Statements as at December 31, 2003
|                                                           

Note 15   Long-term liabilities (contd.)

|b. | In order to obtain the long-term bank credit taken
  by the Company and Sonol, the Company undertook the following covenants to
  the main banks providing the credit:                                                                                                                                                                                   
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                          
|   | 1.                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                          
|   | 2.                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                          
|   | 3.                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                          
|   | On the date of editing the financial statements the
  Company has complied with the covenants. In addition the Company and certain
  subsidiaries agreed not to create a specific collateral on its assets
  (excluding a certain specific existing collateral, and excluding a collateral
  to finance the acquisition and development of those assets).

Note 16   Customers deposits

|a. | The deposits are
  calculated on the basis of present value at an annual rate of interest of 4%.                                  
|-- | ----------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                   
|b. | Customers deposits
  include NIS 32,747 thousand (2002  NIS 36,894 thousand) of linkage
  differences accrued on these deposits.

Note 17   Liabilities for severance pay, net

Consist of:

|                                           |  | December
  31 |       
|------------------------------------------ |  | ------------- | ------
|                                           |  |               |       
|                                           |  | 2003          |       
|                                           |  |               |       
|                                           |  | NIS thousands |       
|                                           |  |               |       
|Liabilities
  for severance pay (a)        |  |               | 14,305
|Less 
  Funded amounts deposited**        |  |               | 5,012 
|                                           |  |               |       
|                                           |  |               | 9,293 
|Liabilities
  for early pension (b)*       |  |               | 11,348
|Reserve
  for redemption of sick leave (c) |  |               | 2,194 
|                                           |  |               |       
|                                           |  |               | 22,835
|                                           |  |               |       

|*  | Does not include NIS 7,445 thousand (2002 - 8,897
  thousand) the current portion of severance pay, net, included in other
  payables.                                        
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                               
|** | The deposited funded amount can be withdrawn subject
  to the provisions of the law. 
  Accumulated profits on these funded amounts are included in the
  statement of income.

-34-

---

---

|                                                           
|-----------------------------------------------------------
|Granite
  Hacarmel Investments Limited and its Subsidiaries
|                                                           
|Notes to
  the Financial Statements as at December 31, 2003
|                                                           

Note 17   Liabilities for severance pay, net (contd.)

|(a) | The Companys liabilities and those of its investee
  companies for payments of pension and severance pay are fully covered by
  provisions for severance pay, deposits in approved pension and severance pay
  funds and managers insurance programs. 
  The deposits in the approved pension and severance pay funds and the
  deposits in managers insurance programs are not included in the financial
  statements as they are not controlled by the companies.                                                                                                                                                                                     
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(b) | The liabilities for early pension are calculated at
  the present value of future liabilities for employees who retire.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The liabilities are until such time when the
  employee reaches the age of 65 (women up to the age of 60) and are calculated
  at a fixed percentage of the maximum pension due to the employee from the
  pension fund.  The discount rate used
  in calculating the liability is based on the stock exchange discount rate for
  annual interest charged on index linked amounts, in effect on the date of the
  employees retirement from the Company.                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | Subsequent to the balance sheet date a law was
  enacted in the Knesset, according to which retirement ages as of April 1,
  2004 will be delayed gradually until the age of 67 for men and 62 for
  women.  Against this the Minister of
  Finance submitted a letter to the chairman of the Finance Committee of the
  Knesset, according to which an annual fund for severance pay will be provided
  for those harmed by the implementation of the law, including employers.  The Companys management is examining all
  the financial and legal aspects as a result of the implementation of the law,
  and its effects on the Companys liabilities.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(c) | According to labor agreements between investee
  companies and their employees, an employee who retires, is entitled to
  receive a partial redemption of the unused sick pay subject to a maximum
  number of sick days.  The reserve was
  prepared in part according to actuarial calculations and in part on the basis
  of past experience based, inter alia, on a net discount  rate (after taking into account the rate
  of real wage costs) of 3%.                                                                                                                                                                                                

-35-

---

---

|                                                           
|-----------------------------------------------------------
|Granite
  Hacarmel Investments Limited and its Subsidiaries
|                                                           
|Notes to
  the Financial Statements as at December 31, 2003
|                                                           

Note 18   Linkage of monetary balances

|                                                                               |  | December 31, 2003       |         | December 31, 2002                     | 
|------------------------------------------------------------------------------ |  | ----------------------- | ------- | ------------------------------------- | 
|                                                                               |  |                         |         |                                       | 
|                                                                               |  | Linked
  to the
  index |         | Linked
  to
  foreign
  currency
  ** | 
|                                                                               |  |                         |         |                                       | 
|                                                                               |  | NIS thousands           |         | NIS thousands                         | 
|                                                                               |  |                         |         |                                       | 
|                                                                               |  |                         |         |                                       | 
|Financial assets:                                                              |  |                         |         |                                       | 
|                                                                               |  |                         |         |                                       | 
|Cash and cash equivalents                                                      |  |                         | -       |                                       | 
|Customers and receivables
  for
       work in progress                        |  |                         | 20,249  |                                       | 
|Other receivables                                                              |  |                         | 778     |                                       | 
|Investments in loans and
       capital notes                                  |  |                         | 7,255   |                                       | 
|Long-term loans, net                                                           |  |                         | 67,472  |                                       | 
|                                                                               |  |                         |         |                                       | 
|                                                                               |  |                         | 95,754  |                                       | 
|                                                                               |  |                         |         |                                       | 
|                                                                               |  |                         |         |                                       | 
|Financial liabilities:                                                         |  |                         |         |                                       | 
|                                                                               |  |                         |         |                                       | 
|Credit from banks and
  others
       (excluding 
  current
       maturities) |  |                         | 1,034   |                                       | 
|Trade payables                                                                 |  |                         | 2,343   |                                       | 
|Other payables                                                                 |  |                         | 24,524  |                                       | 
|Long-term loans (including
       current maturities)                          |  |                         | 706,841 |                                       | 
|Deposits from customers                                                        |  |                         | 58,102  |                                       | 
|                                                                               |  |                         |         |                                       | 
|                                                                               |  |                         | 792,844 |                                       | 
|                                                                               |  |                         |         |                                       | 

|*   | Reclassified                 
|--- | -----------------------------
|**  | Mainly US dollars            
|*** | Part of which bear
  interest

Against
the excess of liabilities linked to foreign currency totaling NIS 150,500
thousand (2002  NIS 152,100 thousand) Sonol holds inventories of fuel totaling
NIS 156,600 thousand (2002  NIS 181,900 thousand), which are mainly Security
inventories valued according to changes in the rate of exchange of the dollar
as explained in Note 2.c.1.

-36-

---

---

|                                                           
|-----------------------------------------------------------
|Granite
  Hacarmel Investments Limited and its Subsidiaries
|                                                           
|Notes to
  the Financial Statements as at December 31, 2003
|                                                           

Note 19   Share capital

|a. | Nominal
|-- | -------

|                                                        |  | Authorized            |         | Issued and
  paid up* | 
|------------------------------------------------------- |  | --------------------- | ------- | --------------------- | 
|                                                        |  |                       |         |                       | 
|                                                        |  | December
  31,
  2003 |         | December
  31,
  2002 | 
|                                                        |  |                       |         |                       | 
|                                                        |  | NIS
  thousands       |         | NIS
  thousands       | 
|                                                        |  |                       |         |                       | 
|225,000,000 ordinary
  shares of
  NIS 1 par value each |  |                       | 225,000 |                       | 
|                                                        |  |                       |         |                       | 

|* | 139,335,657 ordinary
  shares                                                                  
|- | -----------------------------------------------------------------------------------------------
|  | As of December 31, 2003
  and 2002 a subsidiary holds 1,565,540 ordinary shares of the Company.
|  | All the shares are listed
  for trading on the Tel Aviv Stock Exchange.                        

|b. | (Loss)
  Earnings per share                                                       
|-- | ----------------------------------------------------------------------------------
|   |                                                                                   
|1. | Adjusted net (loss) income
  used in calculating earnings per share is as follows:

| |                                               |  | For the year ended December 31 |        
| | --------------------------------------------- |  | ------------------------------ | -------
| |                                               |  |                                |        
| |                                               |  | 2003                           |        
| |                                               |  |                                |        
| |                                               |  | NIS thousands                  |        
| |                                               |  |                                |        
| |                                               |  |                                |        
| | Net (loss) income per
  statement
  of income |  |                                | (96,046
| |                                               |  |                                |        

|2. | The par value of the
  shares used for calculating net income per NIS 1 par value of shares:
|-- | --------------------------------------------------------------------------------------------

| |                                                            |  | For the year ended December 31 |        
| | ---------------------------------------------------------- |  | ------------------------------ | -------
| |                                                            |  |                                |        
| |                                                            |  | 2003                           |        
| |                                                            |  |                                |        
| |                                                            |  | NIS thousands par value        |        
| |                                                            |  |                                |        
| |                                                            |  |                                |        
| | Share capital in
  calculating
  primary earning per share |  |                                | 137,770
| |                                                            |  |                                |        

Note 20   Net sales

| |                          |  | For the year ended December 31 |          
| | ------------------------ |  | ------------------------------ | ---------
| |                          |  |                                |          
| |                          |  | 2003                           |          
| |                          |  |                                |          
| |                          |  | NIS thousands                  |          
| |                          |  |                                |          
| |                          |  |                                |          
| | Commercial operations    |  |                                | 2,429,723
| | Manufacturing operations |  |                                | 439,654  
| | Other operations         |  |                                | 17,696   
| |                          |  |                                |          
| |                          |  |                                | 2,887,073
| |                          |  |                                |          

-37-

---

---

|                                                           
|-----------------------------------------------------------
|Granite
  Hacarmel Investments Limited and its Subsidiaries
|                                                           
|Notes to
  the Financial Statements as at December 31, 2003
|                                                           

Note 21   Cost of sales

Consolidated:

|a. | Consist of:
|-- | -----------

| |                                           |  | For the year ended December 31 |          
| | ----------------------------------------- |  | ------------------------------ | ---------
| |                                           |  |                                |          
| |                                           |  | 2003                           |          
| |                                           |  |                                |          
| |                                           |  | NIS thousands                  |          
| |                                           |  |                                |          
| |                                           |  |                                |          
| | Fuel products and other
  materials used* |  |                                | 1,974,209
| |                                           |  |                                |          
| | Wages and outsourcing                     |  |                                | 42,971   
| |                                           |  |                                |          
| | Manufacturing expenses                    |  |                                | 89,439   
| |                                           |  |                                |          
| | Depreciation and
  amortization           |  |                                | 20,498   
| |                                           |  |                                |          
| |                                           |  |                                |          
| | Total cost of sales                       |  |                                | 2,127,117
| |                                           |  |                                |          
| |                                           |  |                                |          
| | Decrease (increase) in inventories        |  |                                | 24,542   
| |                                           |  |                                |          

|   | *                                          | Financing income
  (expenses) deriving from the erosion of dollar linked credit used  as a source of financing for the
  acquisition of inventories of fuel included in the Cost of sales (See also Note
  2.c.1)
|-- | ------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                           
|b. | Categories according to types of
  income:

| |                          |  | For the year ended December 31 |          
| | ------------------------ |  | ------------------------------ | ---------
| |                          |  |                                |          
| |                          |  | 2003                           |          
| |                          |  |                                |          
| |                          |  | NIS thousands                  |          
| |                          |  |                                |          
| |                          |  |                                |          
| | Commercial operations    |  |                                | 1,819,389
| |                          |  |                                |          
| | Manufacturing operations |  |                                | 298,606  
| |                          |  |                                |          
| | Other operations         |  |                                | 9,122    
| |                          |  |                                |          
| |                          |  |                                | 2,127,117
| |                          |  |                                |          

-38-

---

---

|                                                           
|-----------------------------------------------------------
|Granite
  Hacarmel Investments Limited and its Subsidiaries
|                                                           
|Notes to
  the Financial Statements as at December 31, 2003
|                                                           

Note 22   Selling and marketing expenses

Consist
of:

| |                                                                       |  | For the year ended December 31 |        
| | --------------------------------------------------------------------- |  | ------------------------------ | -------
| |                                                                       |  |                                |        
| |                                                                       |  | 2003                           |        
| |                                                                       |  |                                |        
| |                                                                       |  | NIS thousands                  |        
| |                                                                       |  |                                |        
| |                                                                       |  |                                |        
| | Wages and salaries                                                    |  |                                | 162,731
| | Advertising                                                           |  |                                | 25,998 
| | Depreciation and
  amortization                                       |  |                                | 85,294 
| | Maintenance of buildings,
  installations and
       filling stations |  |                                | 31,728 
| | Rent and municipal taxes                                              |  |                                | 105,617
| | Transport and maintenance
  of commercial
       vehicles             |  |                                | 55,528 
| | Other expenses                                                        |  |                                | 33,947 
| |                                                                       |  |                                |        
| |                                                                       |  |                                | 500,843
| |                                                                       |  |                                |        

Note 23   General and administrative expenses

Consist
of:

| |                                    |  | For the year ended December 31 |        
| | ---------------------------------- |  | ------------------------------ | -------
| |                                    |  |                                |        
| |                                    |  | 2003                           |        
| |                                    |  |                                |        
| |                                    |  | NIS thousands                  |        
| |                                    |  |                                |        
| |                                    |  |                                |        
| | Wages and salaries                 |  |                                | 56,790 
| | Depreciation and
  amortization    |  |                                | 17,110 
| | Consulting, legal and
  auditing   |  |                                | 12,736 
| | Provision for doubtful/bad
  debts |  |                                | 48,954 
| | Other expenses                     |  |                                | 18,422 
| |                                    |  |                                |        
| |                                    |  |                                | 154,012
| |                                    |  |                                |        
| | * Reclassified                     |  |                                |        

Note 24   Financing (expenses) income, net

(Expenses)
income are derived from:

|                                                                                        |  | For the year ended December 31 |         
|--------------------------------------------------------------------------------------- |  | ------------------------------ | --------
|                                                                                        |  |                                |         
|                                                                                        |  | 2003                           |         
|                                                                                        |  |                                |         
|                                                                                        |  | NIS thousands                  |         
|                                                                                        |  |                                |         
|Long-term liabilities                                                                   |  |                                | (58,480 
|Marketable securities, net                                                              |  |                                | 5,460   
|Other receivables and
  payables                                                        |  |                                | 2,379   
|Short-term loans received                                                               |  |                                | (92,540 
|Convertible debentures
  linked to the dollar                                           |  |                                | -       
|(Loss) gain from forward
  transactions                                                 |  |                                | (1,308  
|Others, including erosion
  of other monetary
              assets and liabilities, net |  |                                | 13,984  
|                                                                                        |  |                                |         
|                                                                                        |  |                                | (130,505
|                                                                                        |  |                                |         

-39-

---

---

|                                                           
|-----------------------------------------------------------
|Granite
  Hacarmel Investments Limited and its Subsidiaries
|                                                           
|Notes to
  the Financial Statements as at December 31, 2003
|                                                           

| | Note 25   Other (expenses) income, net
| | ---------------------------------------
| |                                        
| | Consist of:                            

| |                                                                                  |  | For the year ended December 31 |        
| | -------------------------------------------------------------------------------- |  | ------------------------------ | -------
| |                                                                                  |  |                                |        
| |                                                                                  |  | 2003                           |        
| |                                                                                  |  |                                |        
| |                                                                                  |  | NIS thousands                  |        
| |                                                                                  |  |                                |        
| |                                                                                  |  |                                |        
| | Provisions for a decline
  in the value of
  fixed and other assets (a)          |  |                                | (35,480
| | Amortization of assets and
  concessions for
  prospecting for oil and gas (b)   |  |                                | (12,924
| | Write-off of investment in
  affiliated
  company and on the basis of costs, net |  |                                | (5,266 
| | Management fees                                                                  |  |                                | 1,517  
| | Leasing                                                                          |  |                                | 673    
| | Dividends and shares
  received                                                  |  |                                | 145    
| | (Loss) gain from realizing
  investment in
  investee companies                  |  |                                | -      
| | Miscellaneous, net  (c)                                                          |  |                                | (10,832
| |                                                                                  |  |                                |        
| |                                                                                  |  |                                | (62,167
| |                                                                                  |  |                                |        

| | (a) | See also Note 2(q)                                                  
| | --- | --------------------------------------------------------------------
| | (b) | See also Note 31(a)                                                 
| | (c) | Including expenses and provisions for settling
  claims and demands.

Note 26   Taxes on income

|A. | The Company and most of its subsidiaries are
  assessed under the Income Tax Law (Adjustments for Inflation)  1985,
  hereinafter the Adjustments Law, in effect from the 1985 tax year  which
  introduced the measurement of results for tax purposes in real terms.  The various adjustments required by the
  above law should result in taxation based on real income.  Nevertheless, the adjustment of nominal
  income according to the tax Laws is not always identical to the inflationary
  adjustment pursuant to the Pronouncements of the Institute of Certified
  Public Accountants.  As a result,
  differences arise between the adjusted income according to the financial
  statements and the adjusted income for income tax purposes.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | In the financial statements for 2003 the Company
  implemented the law as written and took into account the negative rate of
  change of the index in calculating the tax provision.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

-40-

---

---

|                                                           
|-----------------------------------------------------------
|Granite
  Hacarmel Investments Limited and its Subsidiaries
|                                                           
|Notes to
  the Financial Statements as at December 31, 2003
|                                                           

Note 26   Taxes on income (contd.)

|B. | Amendments to the Income Tax
  Ordinance and the Land Betterment Tax Law
|-- | ------------------------------------------------------------------------
|   |                                                                         
|1. |                                                                         
|   |                                                                         
|   |                                                                         
|2. |                                                                         
|   |                                                                         
|3. |                                                                         
|   |                                                                         
|   |                                                                         
|   |                                                                         
|   |                                                                         
|   |                                                                         

-41-

---

---

|                                                           
|-----------------------------------------------------------
|Granite
  Hacarmel Investments Limited and its Subsidiaries
|                                                           
|Notes to
  the Financial Statements as at December 31, 2003
|                                                           

Note 26   Taxes on income (contd.)

|B. | The amendments to the Income Tax
  Ordinance and the Land Betterment Tax Law (contd.)
|-- | -------------------------------------------------------------------------------------
|   |                                                                                      
|   |                                                                                      
|   |                                                                                      
|   |                                                                                      
|   |                                                                                      
|   |                                                                                      
|   |                                                                                      
|   |                                                                                      
|   |                                                                                      
|   |                                                                                      

-42-

---

---

|                                                           
|-----------------------------------------------------------
|Granite
  Hacarmel Investments Limited and its Subsidiaries
|                                                           
|Notes to
  the Financial Statements as at December 31, 2003
|                                                           

Note 26   Taxes on income (contd.)

|C. | Deferred taxes          
|-- | ------------------------
|   |                         
|   | For the following items:

|                                                |  | Depreciable
  fixed assets |         | Deductions
  and losses
  transferable
  for tax
  purposes |  | Liabilities
  for
  severance
  pay, net |  | Other |        | Total | 
|----------------------------------------------- |  | -------------------------- | ------- | ----------------------------------------------------------- |  | ---------------------------------------- |  | ----- | ------ | ----- | 
|                                                |  |                            |         |                                                             |  |                                          |  |       |        |       | 
|                                                |  | NIS thousands              |        
|                                                |  |                            |        
|                                                |  |                            |         |                                                             |  |                                          |  |       |        |       | 
|Balance as at January 1,
  2002                 |  |                            | (69,362 | )                                                           |  | 295                                      |  |       | 24,709 |       | 
|                                                |  |                            |         |                                                             |  |                                          |  |       |        |       | 
|Changes
  in 2002:                              |  |                            |         |                                                             |  |                                          |  |       |        |       | 
|                                                |  |                            |         |                                                             |  |                                          |  |       |        |       | 
|Current                                         |  |                            | (438    | )                                                           |  | 3,060                                    |  |       | (7,322 | )     | 
|                                                |  |                            |         |                                                             |  |                                          |  |       |        |       | 
|Addition for company
  initially
  consolidated |  |                            | -       |                                                             |  | 462                                      |  |       | 36     |       | 
|                                                |  |                            |         |                                                             |  |                                          |  |       |        |       | 
|                                                |  |                            |         |                                                             |  |                                          |  |       |        |       | 
|Balance as at December 31,
  2002               |  |                            | (69,800 | )                                                           |  | 3,817                                    |  |       | 17,423 |       | 
|                                                |  |                            |         |                                                             |  |                                          |  |       |        |       | 
|Changes
  in 2003:                              |  |                            |         |                                                             |  |                                          |  |       |        |       | 
|                                                |  |                            |         |                                                             |  |                                          |  |       |        |       | 
|Current                                         |  |                            | (1,013  | )                                                           |  | 17,092                                   |  |       | (2,807 | )     | 
|                                                |  |                            |         |                                                             |  |                                          |  |       |        |       | 
|                                                |  |                            |         |                                                             |  |                                          |  |       |        |       | 
|Balance as at December 31,
  2003               |  |                            | (70,813 | )                                                           |  | 20,909                                   |  |       | 14,616 |       | 
|                                                |  |                            |         |                                                             |  |                                          |  |       |        |       | 

The
deferred taxes are presented in the balance sheets as follows:

|                                             |  | December
  31 |        
|-------------------------------------------- |  | ------------- | -------
|                                             |  |               |        
|                                             |  | 2003          |        
|                                             |  |               |        
|                                             |  | NIS thousands |        
|                                             |  |               |        
|                                             |  |               |        
|In current assets                            |  |               | 33,896 
|In current liabilities                       |  |               | (868   
|In other assets and
  deferred expenses, net |  |               | 51,212 
|In long-term liabilities                     |  |               | (68,585
|                                             |  |               |        
|                                             |  |               | 15,655 
|                                             |  |               |        

*   Reclassified

-43-

---

---

|                                                           
|-----------------------------------------------------------
|Granite
  Hacarmel Investments Limited and its Subsidiaries
|                                                           
|Notes to
  the Financial Statements as at December 31, 2003
|                                                           

Note 26   Taxes on income (contd.)

|D. | The provision in the statement of
  income consists of:  expense (income):
|-- | ---------------------------------------------------------------------------

| |                                                                  |  | For the year ended December 31 |        
| | ---------------------------------------------------------------- |  | ------------------------------ | -------
| |                                                                  |  |                                |        
| |                                                                  |  | 2003                           |        
| |                                                                  |  |                                |        
| |                                                                  |  | NIS thousands                  |        
| |                                                                  |  |                                |        
| |                                                                  |  |                                |        
| | Current taxes including
  erosion of
       advance tax payments |  |                                | 20,889 
| | Deferred taxes, net                                              |  |                                | (31,396
| |                                                                  |  |                                |        
| |                                                                  |  |                                |        
| |                                                                  |  |                                | (10,507
| |                                                                  |  |                                |        
| | Taxes on account of
  previous years                             |  |                                | 879    
| |                                                                  |  |                                |        
| |                                                                  |  |                                |        
| |                                                                  |  |                                | (9,628 
| |                                                                  |  |                                |        
| |                                                                  |  |                                |        

|E. | Final assessments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The Company, Sonol and Supergas received final
  assessments through the 1999 tax year. 
  The assessments for these companies were completed in 2002 within the
  framework of a compromise with the Tax Authorities.  The net effect, part of which results from timing differences,
  was included in financial results for 2002. 
  Sprint Motors Ltd. received final tax assessments through 1998. All
  other companies in the Group, have final tax assessments within the framework
  of Section 145(a)(2)  Income Tax Ordinance (Statute of Limitations) through
  years 1997 and 1998.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|F. | Losses, deductions and additional
  tax for the purpose of tax to be carried forward to future years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Losses for tax purposes of the Company and its
  subsidiaries to be carried forward to future years, as of the balance sheet
  date reached an adjusted amount of NIS 99,000 thousand.                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The balances of losses and deductions carried
  forward to following years are index linked - in accordance with the
  Adjustments Law mentioned in (a) above.                                                                                                                                                                                                                                                                                                                                                                                                                                   

-44-

---

---

|                                                           
|-----------------------------------------------------------
|Granite
  Hacarmel Investments Limited and its Subsidiaries
|                                                           
|Notes to
  the Financial Statements as at December 31, 2003
|                                                           

Note 26   Taxes on income (contd.)

|G. | Reconciliation between the
  theoretical tax on pre-tax adjusted income and the provision for tax included
  in the statements
|-- | ------------------------------------------------------------------------------------------------------------------------------

| |                                                                                                                |  | For the year ended December 31 |        
| | -------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | -------
| |                                                                                                                |  |                                |        
| |                                                                                                                |  | 2003                           |        
| |                                                                                                                |  |                                |        
| |                                                                                                                |  | NIS thousands                  |        
| |                                                                                                                |  |                                |        
| |                                                                                                                |  |                                |        
| | Statutory tax rates                                                                                            |  |                                | 36     
| |                                                                                                                |  |                                |        
| |                                                                                                                |  |                                |        
| | Theoretical tax per
  applicablet tax rates                                                                    |  |                                | (31,526
| |                                                                                                                |  |                                |        
| | Differences in definition
  of capital, assets
       and expenses for tax purposes and others,
       net (1) |  |                                | 21,108 
| |                                                                                                                |  |                                |        
| | Erosion of advance tax
  payments                                                                              |  |                                | (89    
| |                                                                                                                |  |                                |        
| | Taxes on account of
  previous years                                                                           |  |                                | 879    
| |                                                                                                                |  |                                |        
| |                                                                                                                |  |                                | (9,628 
| |                                                                                                                |  |                                |        

| | (1)            | Including NIS 9,770
  thousand for losses and deductions on which no deferred taxes were
  apportioned
| | -------------- | ------------------------------------------------------------------------------------------------------
| |                |                                                                                                       
| | * Reclassified

-45-

---

---

|                                                           
|-----------------------------------------------------------
|Granite
  Hacarmel Investments Limited and its Subsidiaries
|                                                           
|Notes to
  the Financial Statements as at December 31, 2003
|                                                           

Note 27   Segment reporting

Segment reporting by products and
services:

The accounting principles applied in the segment
reporting are in accordance with those adopted for the purpose of preparing and
presenting the Companys consolidated financial statements.

|                                                |  | For the
  year ended December 31, 2003 |          
|----------------------------------------------- |  | -------------------------------------- | ---------
|                                                |  |                                        |          
|                                                |  | Fueland gas                            |          
|                                                |  |                                        |          
|                                                |  | NIS thousands                          |          
|                                                |  |                                        |          
|                                                |  |                                        |          
|Profit
  and loss data:                         |  |                                        |          
|                                                |  |                                        |          
|Income                                          |  |                                        |          
|Net external sales                              |  |                                        | 2,400,768
|Sales within segments                           |  |                                        | -        
|                                                |  |                                        |          
|Total sales                                     |  |                                        | 2,400,768
|                                                |  |                                        |          
|                                                |  |                                        |          
|Results                                         |  |                                        |          
|                                                |  |                                        |          
|Segment results                                 |  |                                        | 83,040   
|Unallocated expenses                            |  |                                        |          
|                                                |  |                                        |          
|Income from operations                          |  |                                        |          
|Financing expenses                              |  |                                        |          
|Financing income                                |  |                                        |          
|Other expenses, net                             |  |                                        |          
|Taxes on income                                 |  |                                        |          
|Minority interest in
  results of subsidiaries  |  |                                        |          
|Share in results of
  affiliated companies, net |  |                                        | (717     
|                                                |  |                                        |          
|Net loss                                        |  |                                        |          
|                                                |  |                                        |          
|                                                |  |                                        |          
|Additional
  information                        |  |                                        |          
|                                                |  |                                        |          
|Segment assets                                  |  |                                        | 2,017,859
|Investments by the equity
  method              |  |                                        | 9,725    
|Unallocated assets                              |  |                                        |          
|                                                |  |                                        |          
|Total consolidated assets                       |  |                                        |          
|                                                |  |                                        |          
|                                                |  |                                        |          
|Segment liabilities                             |  |                                        | 256,994  
|Unallocated liabilities                         |  |                                        |          
|                                                |  |                                        |          
|Total consolidated
  liabilities                |  |                                        |          
|                                                |  |                                        |          
|                                                |  |                                        |          
|Capital investments                             |  |                                        | 127,521  
|Depreciation and
  amortization                 |  |                                        | 80,786   

-46-

---

---

Granite
Hacarmel Investments Limited and its Subsidiaries

---

Note 27   Segment reporting (contd.)

|                                              |  | For the
  year ended December 31, 2002 |          
|--------------------------------------------- |  | -------------------------------------- | ---------
|                                              |  |                                        |          
|                                              |  | Fuel
  and Gas                         |          
|                                              |  |                                        |          
|                                              |  | NIS thousands                          |          
|                                              |  |                                        |          
|                                              |  |                                        |          
|Profit
  and loss data:                       |  |                                        |          
|                                              |  |                                        |          
|Income                                        |  |                                        |          
|                                              |  |                                        |          
|Net external sales                            |  |                                        | 2,390,410
|Sales within segments                         |  |                                        | -        
|                                              |  |                                        |          
|Total sales                                   |  |                                        | 2,390,410
|                                              |  |                                        |          
|                                              |  |                                        |          
|Results                                       |  |                                        |          
|                                              |  |                                        |          
|Segment results                               |  |                                        | 140,991  
|Unallocated expenses                          |  |                                        |          
|                                              |  |                                        |          
|Income from operations                        |  |                                        |          
|Financing expenses                            |  |                                        |          
|Financing income                              |  |                                        |          
|Other expenses, net                           |  |                                        |          
|Taxes on income                               |  |                                        |          
|Minority interest in results of subsidiaries  |  |                                        |          
|Share in results of affiliated companies, net |  |                                        | (318     
|                                              |  |                                        |          
|Net loss                                      |  |                                        |          
|                                              |  |                                        |          
|                                              |  |                                        |          
|Additional
  information                      |  |                                        |          
|                                              |  |                                        |          
|Segment assets                                |  |                                        | 2,071,957
|Investments by the equity method              |  |                                        | 8,982    
|Unallocated assets                            |  |                                        |          
|                                              |  |                                        |          
|Total consolidated assets                     |  |                                        |          
|                                              |  |                                        |          
|                                              |  |                                        |          
|Segment liabilities                           |  |                                        | 253,856  
|Unallocated liabilities                       |  |                                        |          
|                                              |  |                                        |          
|Total consolidated liabilities                |  |                                        |          
|                                              |  |                                        |          
|                                              |  |                                        |          
|Capital investments                           |  |                                        | 99,377   
|Depreciation and amortization                 |  |                                        | 88,688   

* Reclassified

-47-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

---

Note 27   Segment reporting (contd.)

|                                              |  | For the
  year ended December 31, 2001 |          
|--------------------------------------------- |  | -------------------------------------- | ---------
|                                              |  |                                        |          
|                                              |  | Fuel
  and Gas                         |          
|                                              |  |                                        |          
|                                              |  | NIS thousands                          |          
|                                              |  |                                        |          
|                                              |  |                                        |          
|Profit
  and loss data:                       |  |                                        |          
|                                              |  |                                        |          
|Income                                        |  |                                        |          
|                                              |  |                                        |          
|Net external sales                            |  |                                        | 2,446,189
|Sales among segments                          |  |                                        | -        
|                                              |  |                                        |          
|Total sales                                   |  |                                        | 2,446,189
|                                              |  |                                        |          
|                                              |  |                                        |          
|Results                                       |  |                                        |          
|                                              |  |                                        |          
|Segment results                               |  |                                        | *138,563 
|Unallocated expenses                          |  |                                        |          
|                                              |  |                                        |          
|Income from operations                        |  |                                        |          
|Financing expenses                            |  |                                        |          
|Financing income                              |  |                                        |          
|Other expenses, net                           |  |                                        |          
|Taxes on income                               |  |                                        |          
|Minority interest in results of subsidiaries  |  |                                        |          
|Share in results of affiliated companies, net |  |                                        | (928     
|                                              |  |                                        |          
|                                              |  |                                        |          
|Net loss                                      |  |                                        |          
|                                              |  |                                        |          

* Reclassified

-48-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

---

Note 28   Collateral, commitments and
contingent liabilities

|A | Floating
  and fixed charges  
|- | ------------------------------
|  | In consolidated balance sheet:

| |                              |  | Dec. 31, 2003 |  |                                                                                                                                                                                                                                                                                                                                                           
| | ---------------------------- |  | ------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                              |  |               |  |                                                                                                                                                                                                                                                                                                                                                           
| |                              |  | NIS thousands |  | Secured
  by                                                                                                                                                                                                                                                                                                                                              
| |                              |  |               |  |                                                                                                                                                                                                                                                                                                                                                           
| | Bank overdrafts              |  | 1,345         |  | Floating charge on current assets of main investee
  companies and on non-current inventories of a subsidiary.                                                                                                                                                                                                                                            
| |                              |  |               |  |                                                                                                                                                                                                                                                                                                                                                           
| | Short-term loans from banks  |  | 1,102,213     |  | Charge on the shares of some of the investee
  companies and on current assets, non-current inventories and on other assets
  and on the land owned by some of the investee companies.                                                                                                                                                                    
| |                              |  |               |  |                                                                                                                                                                                                                                                                                                                                                           
| | Long-term loans from banks   |  | 933,663       |  | Charge on the shares of some of the investee
  companies.  Floating charge on current
  assets and on non-current inventories of some of the main investee companies,
  a charge on rights in land owned by 
  an investee company and a fixed charge on some of the fixed assets of
  some of the investee companies (see Note 15b, and paragraph C2(a)).
| |                              |  |               |  |                                                                                                                                                                                                                                                                                                                                                           
| | Investment grants            |  | 590           |  | Current and floating charge on a portion of of the
  fixed assets of subsidiaries.                                                                                                                                                                                                                                                                        
| |                              |  |               |  |                                                                                                                                                                                                                                                                                                                                                           
| | Rights of affiliated company |  | -             |  | A first mortgage on all the rights of an investee company
  in an affiliated company in order to secure 50% of the credit totaling NIS 75
  million provided to the affiliated company.                                                                                                                                                                   

-49-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

---

Note 28   Collateral, commitments and
contingent liabilities (contd.)

|B. | Contingent
  liabilities and claims               
|-- | --------------------------------------------------
|   |                                                   
|1. | Indemnification
  and insurance of officers       
|   |                                                   
|   | A special general meeting of the Company approved:
|   | a.                                                
|   |                                                   
|   | b.                                                
|   |                                                   
|   | c.                                                
|   |                                                   
|2. | Pending
  litigation                              
|   |                                                   
|   | a.                                                
|   |                                                   
|   |                                                   

-50-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

---

Note 28   Collateral, commitments and
contingent liabilities (contd.)

|B. | Contingent
  liabilities and claims (contd.)
|-- | --------------------------------------------
|   |                                             
|2. | Pending
  litigation (contd.)               
|   |                                             
|   |                                             
|   |                                             
|   |                                             
|   |                                             
|   |                                             

-51-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

---

Note 28   Collateral, commitments and
contingent liabilities (contd.)

|B. | Contingent
  liabilities and claims (contd.)
|-- | --------------------------------------------
|   |                                             
|2. | Pending
  litigation (contd.)               
|   |                                             
|   | b.                                          
|   |                                             
|   |                                             
|   |                                             
|   |                                             
|   |                                             

-52-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

---

Note 28   Collateral, commitments and
contingent liabilities (contd.)

|B. | Contingent
  liabilities and claims (contd.)
|-- | --------------------------------------------
|   |                                             
|2. | Pending
  litigation (contd.)               
|   |                                             
|   | 3.                                          
|   |                                             
|   | 4.                                          
|   |                                             
|   | 5.                                          

-53-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

---

Note 28
  Collateral, commitments and contingent liabilities (contd.)

|B. | Contingent
  liabilities and claims (contd.)
|-- | --------------------------------------------
|   |                                             
|2. | Pending
  litigation (contd.)               
|   |                                             
|   |                                             
|   |                                             
|   | 6.                                          

-54-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

---

Note 28
  Collateral, commitments and contingent liabilities (contd.)

|B. | Contingent
  liabilities and claims (contd.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|2. | Pending
  litigation (contd.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | 7.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | 8.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|c. | 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 price
  fixing of gasoil to consumers.  This
  claim, after being updated and, if allowed as a class action, will amount to
  approximately NIS. 244 million, of which Sonols share is approximately NIS.
  57 million. Sonol rejects the claim outright and, in the opinion of the
  companys management, based on the opinion of its legal counsel, chances are
  reasonable to good that it will not be allowed as a class action.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|d. | Additional claims filed against Sonol are:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

-55-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

---

Note 28
  Collateral, commitments and contingent liabilities (contd.)

|B. | Contingent
  liabilities and claims (contd.)
|-- | --------------------------------------------
|   |                                             
|2. | Pending
  litigation (contd.)               
|   |                                             
|   | 2.                                          
|   |                                             
|   | 3.                                          
|   |                                             
|   | 4.                                          
|   |                                             
|   | 5.                                          
|   |                                             
|   | 6.                                          

-56-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

---

Note 28   Collateral, commitments and
contingent liabilities (contd.)

|B. | Contingent
  liabilities and claims (contd.)                 
|-- | -------------------------------------------------------------
|   |                                                              
|2. | Pending
  litigation (contd.)                                
|   |                                                              
|   |                                                              
|   |                                                              
|   | 7.                                                           
|   |                                                              
|e. | Supergas is involved in class and other actions as
  follows:
|   |                                                              
|   | 1.                                                           

-57-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

---

Note 28   Collateral, commitments and
contingent liabilities (contd.)

|B. | Contingent
  liabilities and claims (contd.)
|-- | --------------------------------------------
|   |                                             
|2. | Pending
  litigation (contd.)               
|   |                                             
|   |                                             
|   |                                             
|   |                                             
|   |                                             
|   |                                             
|   |                                             
|   |                                             
|   |                                             

-58-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

---

Note 28
  Collateral, commitments and contingent liabilities (contd.)

|B. | Contingent
  liabilities and claims (contd.)                                                                                          
|-- | --------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                       
|2. | Pending
  litigation (contd.)                                                                                                         
|   |                                                                                                                                       
|   |                                                                                                                                       
|   |                                                                                                                                       
|   | f.                                                                                                                                    
|   |                                                                                                                                       
|   | g.                                                                                                                                    
|   |                                                                                                                                       
|   | In the opinion of the Companys management , the
  provisions made to cover the results of the claims detailed above are
  sufficient.
|   |                                                                                                                                       
|   | h.                                                                                                                                    

-59-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

---

Note 28   Collateral, commitments and
contingent liabilities (contd.)

|C. | The
  subsidiaries have commitments and liabilities on the balance sheet date as
  follows:
|-- | -------------------------------------------------------------------------------------------
|   |                                                                                            
|1. | Commitments
  for investments:                                                             

|                                                                                                              |  | NIS thousands | 
|------------------------------------------------------------------------------------------------------------- |  | ------------- | 
|                                                                                                              |  |               | 
|Acquisition of fixed assets                                                                                   |  | 116,770       | 
|Supply of fuel, oil and equipment (delivery January
   December 2004)                                        |  | 572,701       | 
|Executing projects                                                                                            |  | 64,380        | 
|Rental and leasing of stations, installations and
  buildings from agents
    according to signed agreements* |  | 1,296,618     | 
|Leasing and rental of a computer and peripheral
  equipment for a period
  of up to a year                    |  | 4,183         | 
|Automobile operating lease agreements**                                                                       |  | 9,768         | 
|Amounts payable for management services (See Note
  30b).                                                     |  | 4,204         | 
|Amounts payable for consulting services (See Note
  30b).                                                     |  | 368           | 
|                                                                                                              |  |               | 
|* Following are dates of payment of the rental and
  leasing liabilities:                                     |  |               | 
|2004                                                                                                          |  | 104,670       | 
|2005                                                                                                          |  | 95,813        | 
|2006                                                                                                          |  | 90,908        | 
|2007                                                                                                          |  | 84,997        | 
|2008                                                                                                          |  | 81,085        | 
|2009 and thereafter                                                                                           |  | 839,145       | 
|                                                                                                              |  |               | 
|                                                                                                              |  | 1,296,618     | 
|                                                                                                              |  |               | 
|                                                                                                              |  |               | 
|** Following are the dates of payment of liabilities
  for operating lease
  agreements for vehicles:         |  |               | 
|2004                                                                                                          |  | 5,522         | 
|2005                                                                                                          |  | 3,277         | 
|2006                                                                                                          |  | 969           | 
|                                                                                                              |  |               | 
|                                                                                                              |  | 9,768         | 
|                                                                                                              |  |               | 

|2. | Commitments
  for investments:
|-- | ------------------------------
|   |                               
|   | a.                            
|   |                               
|   |                               

-60-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

---

Note 28
  Collateral, commitments and contingent liabilities (contd.)

|C. | The
  subsidiaries have commitments and liabilities on the balance sheet date as
  follows:  (contd.)
|-- | -----------------------------------------------------------------------------------------------------
|   |                                                                                                      
|2. | Commitments
  for investments: (contd.)                                                              
|   |                                                                                                      
|   | b.                                                                                                   
|   |                                                                                                      
|   | c.                                                                                                   
|   |                                                                                                      
|   | d.                                                                                                   
|   |                                                                                                      
|   | e.                                                                                                   
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      

-61-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

---

Note 28   Collateral, commitments and
contingent liabilities (contd.)

|C. | The
  subsidiaries have commitments and liabilities on the balance sheet date as
  follows:  (contd.)
|-- | -----------------------------------------------------------------------------------------------------
|   |                                                                                                      
|2. | Commitments
  for investments: (contd.)                                                              
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      

-62-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

---

Note 28   Collateral, commitments and
contingent liabilities (contd.)

|C. | The
  subsidiaries have commitments and liabilities on the balance sheet date as follows:  (contd.)
|-- | ---------------------------------------------------------------------------------------------------
|   |                                                                                                    
|2. | Commitments
  for investments: (contd.)                                                            
|   |                                                                                                    
|   |                                                                                                    
|   |                                                                                                    
|   |                                                                                                    
|   |                                                                                                    
|   |                                                                                                    
|   |                                                                                                    
|   |                                                                                                    
|   |                                                                                                    
|   |                                                                                                    

-63-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

---

Note 28   Collateral, commitments and
contingent liabilities (contd.)

|C. | The
  subsidiaries have commitments and liabilities on the balance sheet date as
  follows:  (contd.)
|-- | -----------------------------------------------------------------------------------------------------
|   |                                                                                                      
|2. | Commitments
  for investments: (contd.)                                                              
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      

-64-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

---

Note 28   Collateral, commitments and
contingent liabilities (contd.)

|C. | The
  subsidiaries have commitments and liabilities on the balance sheet date as
  follows:  (contd.)
|-- | -----------------------------------------------------------------------------------------------------
|   |                                                                                                      
|2. | Commitments
  for investments: (contd.)                                                              
|   |                                                                                                      
|   | f.                                                                                                   
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      
|   |                                                                                                      

-65-

---

---

Granite Hacarmel Investments Limited and its Subsidiaries

---

Note 28   Collateral, commitments and
contingent liabilities (contd.)

|D. | Subsidiaries
  have contingent liabilities on the balance sheet date as follows:
|-- | --------------------------------------------------------------------------------

|   |  |                                                                                                                                                                                                   |  | NIS thousands    | 
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | 
|   |  |                                                                                                                                                                                                   |  |                  | 
|1. |  | Acquisition of equipment  open letter of credit                                                                                                                                                  |  | 584              | 
|   |  |                                                                                                                                                                                                   |  |                  | 
|2. |  | Bank gurantees for customers and investee companies                                                                                                                                               |  | 65,340           | 
|   |  |                                                                                                                                                                                                   |  |                  | 
|3. |  | Performance guarantees to customers and others                                                                                                                                                    |  | 23,742           | 
|   |  |                                                                                                                                                                                                   |  |                  | 
|4. |  | Guarantees to the authorities                                                                                                                                                                     |  | 655              | 
|   |  |                                                                                                                                                                                                   |  |                  | 
|5. |  | Bank guarantees for credit and other liabilities of
  affiliated
  companies                                                                                                                      |  | 474              | 
|   |  |                                                                                                                                                                                                   |  |                  | 
|6. |  | Other guarantees*                                                                                                                                                                                 |  | 3,879            | 
|   |  |                                                                                                                                                                                                   |  |                  | 
|7. |  | A guarantee to a government agency on account of the
  liabilities of a subsidiary regarding its share in an oil and gas
  exploration drilling agreement                                         |  | Unlimited amount | 
|   |  |                                                                                                                                                                                                   |  |                  | 
|8. |  | A guarantee given on account of the liabilities of a
  subsidiary
  regarding participation in a tender                                                                                           |  | Unlimited amount | 
|   |  |                                                                                                                                                                                                   |  |                  | 
|9. |  | A guarantee to the State of Israel for grants that
  an affiliated
  company received from the Government of Israel in
  accordance with Law for the Encouragement of Capital
  Investments 1959 |  | Unlimited amount | 

|*  | On April 1, 2004 a guarantee, which on the balance
  sheet date stood at NIS 5 million will increase to NIS 13.2 million.  The guarantee was given in favor of the
  State of Israel regarding compliance with the provisions of Section 3a of the
  edict-Supervision of Goods and Services Prices (Prices at Filling Stations) 
  2002.                                                                       
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                  
|E. | Credit
  risks                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                  
|1. | The maximium credit risk that the Company faces
  regarding its financial assets does not exceed the amount of their book value
  less existing collateral.                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                  
|2. | The concentration of  credit risks results from a subsidiary having a number of  customers and long-term receivables
  (long-term loans granted), which are of a similar nature (independent fuel
  agents).  The highest balance is that
  of an agent whose current debt (included in trade receivables) and  long-term debt (included in long-term
  loans granted) amounts to approximately NIS 25.3 million.
|   | A portion of amounts due from customers is
  collateralized as is customary in the industry.  In addition, the subsidiary has long-term service agreements
  which give it the right to offset amounts against the receivable payments.                                                                                                                                                                          
|   | The statements include a specific provision for
  debts whose collection in managements opinion is in doubt.                                                                                                                                                                                                                                                                                                    

-66-

---

---

Granite
Hacarmel Investments Limited and its Subsidiaries

|Notes to the Financial Statements
  as at December 31, 2003
|-----------------------------------------------------------
|                                                           

Note 28   Collateral, commitments and contingent liabilities
(contd.)

|F. | Forward currency transactions
|-- | -----------------------------

|                 |  | Currency
  receivable |  | Currency
  payable |  | Date of maturity /
  redemption /
  realization |  | Amounts
  receivable |       | Amounts
  payable |  | Fair
  value |      
|---------------- |  | --------------------- |  | ------------------ |  | ----------------------------------------------- |  | -------------------- | ----- | ----------------- |  | ------------ | -----
|                 |  |                       |  |                    |  |                                                 |  |                      |       |                   |  |              |      
|                 |  |                       |  |                    |  |                                                 |  | NIS
  thousands      |      
|                 |  |                       |  |                    |  |                                                 |  |                      |      
|                 |  | US dollars            |  | NIS                |  | (1)                                             |  |                      | 2,199 |                   |  |              | 2,204
|                 |  | Euro                  |  | NIS                |  | (1)                                             |  |                      | 2,765 |                   |  |              | 2,674
|                 |  |                       |  |                    |  |                                                 |  |                      |       |                   |  |              |      
|Total            |  |                       |  |                    |  |                                                 |  |                      | 4,964 |                   |  |              | 4,878
|                 |  |                       |  |                    |  |                                                 |  |                      |       |                   |  |              |      
|(1) January 2004 |  |                       |  |                    |  |                                                 |  |                      |       |                   |  |              |      

|G. | Fair value of financial instruments                                                                                                                                                                                                      
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                          
|   | The book amount of cash and cash equivalents,
  short-term investments, trade receivables, other receivables, credit from
  banks and others, liabilities for trade payables and other payables are equal
  or close to their fair value.
|   |                                                                                                                                                                                                                                          
|   | Fair value as at December 31, 2003 of long-term
  loans given, is higher by NIS 1.5 million than their book value.                                                                                                                       

Note 29   Events relating to the fuel sectorAccording to the Law for Arrangements in the State of Economy
 2001 and its regulations, changes have been enacted regarding the holding of
Emergency inventories of fuel products. According to the new regulations the
Security inventories are to be held in separate tanks at specified locations
and earmarked for use in times of emergency. 
In view of this, these inventories are presented as  Non-current inventories.  The State will continue to finance the holding
of the inventories and guarantee the value of the fuel defined as Security
inventories.  A regulation regarding
holding of Civilian inventories, stipulated in the same law, was cancelled in
2002.

Sonol is exposed to
changes in the value of its operating inventories used to meet its current
needs, as a result of fluctuations in fuel market prices.  Fluctuations in the fuel prices could
significantly affect Sonols periodic business results.  Sonol is exploring ways to minimize such
effects.  It is not possible to estimate
the effects of these changes on Sonols business results.

-67-

---

---

Granite
Hacarmel Investments Limited and its Subsidiaries

|Notes to the Financial Statements
  as at December 31, 2003
|-----------------------------------------------------------
|                                                           

Note 30   Transactions and balances with interested and
related parties

|a. | Income
  and expenses from interested and related parties
|-- | ---------------------------------------------------------
|   |                                                          
|1. | Consist of:                                              

|                                  |  | For the
  year December 31, | 
|--------------------------------- |  | --------------------------- | 
|                                  |  |                             | 
|                                  |  | 2003                        | 
|                                  |  |                             | 
|                                  |  | NIS
  thousands             | 
|                                  |  |                             | 
|                                  |  | Interested
  parties        | 
|                                  |  |                             | 
|Financing income                  |  | -                           | 
|Income from
  management services |  | -                           | 
|Purchase of fuel
  products       |  | 195,359                     | 
|Purchase of services              |  | 347                         | 

|2. | In purchases from an interested party the price of
  the transaction is determined by referring to the Oil Refineries Ltd. gate
  price at that time and to the prices which were offered by other competing
  suppliers.  The price of the
  transaction at all times was lower than any other alternative that Sonol had
  at that time.  The credit terms are
  not less than those which were given by the Oil Refineries Ltd. or by any
  other supplier.                                                      
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|3. | Other transactions with interested and related
  parties are also conducted in the normal course of business and at regular
  credit terms and do not exceed 10% of the Companys transactions.  The Company was granted an exemption
  pursuant to Section 64(3)d of the Securities Regulations [(Preparation of
  Annual Financial Statements (Amendment)]  1995 from the requirement to
  disclose transactions with interested parties and investee companies in the
  normal course of the Companys business.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4. | Sonol purchases most of its fuel products from Oil
  Refineries Ltd. which is obligated to supply its products to the fuel
  companies  at refinery gate prices
  which are controlled by the government.                                                                                                                                                                                                                                                                                                           

-68-

---

---

Granite
Hacarmel Investments Limited and its Subsidiaries

|Notes to the Financial Statements
  as at December 31, 2003
|-----------------------------------------------------------
|                                                           

Note 30   Transactions and balances with interested and
related parties (contd.)

|b. | Benefits to interested parties
|-- | ------------------------------

|      |                                                  |  | For the
  year ended December 31, | 
|----- | ------------------------------------------------ |  | --------------------------------- | 
|      |                                                  |  |                                   | 
|Group |                                                  |  | Number of
  people                | 
|      |                                                  |  |                                   | 
|      |                                                  |  |                                   | 
|      |                                                  |  |                                   | 
|      |                                                  |  |                                   | 
|1.    | Interested party employed
  by the
  Corporation |  | 1-2                               | 
|      |                                                  |  |                                   | 
|2.    | Directors fees                                   |  | 12                                | 
|      |                                                  |  |                                   | 
|3.    | Management and consulting
  services**           |  |                                   | 

|4. | Regarding indemnity and
  insurance of directors and officers  see Note 28(b)(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|5. | According to the employment agreement signed with
  the Companys Chief Executive Officer(CEO), the period of his employment will
  be until June 2006 (which be extended automatically unless terminated by one
  of the parties).  Should the Company
  terminate the agreement and/or should control in the Company be transferred
  within the meaning of the employment agreement, the CEO will be entitled to
  receive the balance of the salaries that he would have received up to June
  2006, but not less than for a period of 12 months.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|*  | Including payments to a former interested  party whose term ended  during 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|** | The Company has an agreement with an interested
  party to pay $40,000 per month for management services for a period of 36
  months beginning January 1, 2003.  The
  expenses for the management services were approved at the General Meeting of
  the Company.  In addition, the Company
  entered into an agreement with an interested party to pay $7,000 per month
  for consulting services.  Each of the
  parties may terminate the agreement with prior notice of two months to the
  other party.                                        

-69-

---

---

Granite
Hacarmel Investments Limited and its Subsidiaries

|Notes to the Financial Statements
  as at December 31, 2003
|-----------------------------------------------------------
|                                                           

Note 30   Transactions and balances with interested and
related parties (contd.)

|c. | Balances with interested and
  related parties
|-- | ----------------------------------------------

|                                                                 |  | December
  31, 2003  |  | December
  31, 2002 | 
|---------------------------------------------------------------- |  | -------------------- |  | ------------------- | 
|                                                                 |  |                      |  |                     | 
|                                                                 |  | NIS
  thousands      |  | NIS
  thousands     | 
|                                                                 |  |                      |  |                     | 
|                                                                 |  | Interested
  parties |  | Related
  parties   | 
|                                                                 |  |                      |  |                     | 
|Current
  assets                                                 |  |                      |  |                     | 
|                                                                 |  |                      |  |                     | 
|Trade receivables                                                |  | 1,144                |  | 1,141               | 
|Other receivables                                                |  | 54                   |  | -                   | 
|                                                                 |  |                      |  |                     | 
|                                                                 |  | 1,198                |  | 1,141               | 
|                                                                 |  |                      |  |                     | 
|Loans and capital notes to
  investee
  companies                |  |                      |  | 17,046              | 
|                                                                 |  |                      |  |                     | 
|Highest balance during the
  year with
  an interested party     |  | 2,006                |  |                     | 
|                                                                 |  |                      |  |                     | 
|Current
  liabilities                                            |  |                      |  |                     | 
|Trade liabilities                                                |  |                      |  | 2,932               | 
|Other liabilities                                                |  | -                    |  | 259                 | 
|                                                                 |  |                      |  |                     | 
|                                                                 |  | -                    |  | 3,191               | 
|                                                                 |  |                      |  |                     | 
|Highest balance during the
  year with
  interested party        |  | 32,489               |  |                     | 
|                                                                 |  |                      |  |                     | 
|Commitment for the
  acquisition of
  fuel from interested party |  | -                    |  |                     | 
|                                                                 |  |                      |  |                     | 

Note 31   Subsequent events

|a. | In February 2004, Isramco
  Inc, the operator of the Med-Ashdod holding, announced that the supply of
  gas from the well Nir-1, in which the Company is a partner, holding 35% of
  its rights, is not  economically feasibile.  The partners must inform the operator by
  not later than March 29, 2004 of their intentions. The balance of the
  Companys investment in the holdings concession rights is insignificant.                                                                                                                                                                                                                                               
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|b. | In February 2004 the
  Company submitted a proposal to Nitzba Hitnahalut for the purchase of Nitzba
  Hitnahaluts shares.  Concurrently,
  the Company announced negotiations taking place for the sale of its holdings.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|c. | In February 2004, Tambour
  submitted a request to the Tel Aviv Jaffa District Court for the approval of
  a distribution pursuant to paragraph 303 of the Companies Law  1999 and for
  reduction in its capital deriving from the proposed distribution.  Tambours creditors may file an objection
  in court against  the proposed
  distribution within 30 days of the date of its filing the request or within a
  later period as determined by the court. 
  Tambour intends to pay a cash dividend to the Company of an amount not
  exceeding NIS 400,000 thousand, of which an amount not exceeding NIS 379,358
  thousand is a distribution not out of its profits.

-70-

---

---

Granite
Hacarmel Investments Limited and its Subsidiaries

|Notes to the Financial Statements
  as at December 31, 2003
|-----------------------------------------------------------
|                                                           

Note 31   Subsequent events (contd.)

|d. | Following a  claim filed by the fuel companies Paz,
  Delek and Sonol and Dor Energy against the Oil Refineries Ltd., Oil
  Infrastructures and Energy Ltd. and the State of Israel in November 2002
  totaling approximately NIS 25 million (Sonols share amounts to approximately
  NIS 4.6 million) on account of damages incurred  as a result of negligent maintenance of inventories  of crude oil, the State of Israel in March
  2004 submitted a claim against Sonol, Paz, Delek and Dor Energy and against
  the Oil Refineries and the Oil Infrastructures and Energy Ltd., contending
  that over the years they collected storage fees and insurance for the
  Emergency fuel inventories of the State of Israel.  According to the State it became clear retroactively that a
  considerable part of the inventories was not usable, having turned into
  sludge, due to the negligence of the Refineries, the Oil Infrastructure and
  Energy Ltd. and the other fuel companies noted above. Sonols share is
  approximately NIS 21 million.  The
  fuel companies reject the States contentions outright.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|e. | In March 2004 a financial claim was filed against
  Supergas by a supplier, in the amount of NIS 5 million.  The supplier contends that it carried out
  various projects for Supergas in the field of computerization, consulting and
  information systems, but Supergas did not pay all the amounts due for these
  projects.  Supergas management
  rejects the contentions in the claim outright.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

NOTE 32
  Financial statements translated into U.S. dollars

| | The financial records of the Company and its
  consolidated companies are maintained on a current basis in historical
  nominal New Israel Shekels 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.

-71-

---

---

Granite
Hacarmel Investments Limited and its Subsidiaries

|Notes to the Financial Statements
  as at December 31, 2003
|-----------------------------------------------------------
|                                                           

NOTE 32
  Financial statements translated into U.S. dollars

| | CONSOLIDATED BALANCE SHEETS
  (In thousands)           | 
| | ------------------------------------------------------ | 
| |                                                        | 
| |                                                        | 
| |                                                        | 
| |                                                        | 
| |                                                        | 
| |                                                        | 
| |                                                        | 
| |                                                        | 
| | Current
  assets                                       | 
| | Cash
  and cash equivalents                            | 
| | Marketable
  securities                                | 
| | Trade
  receivables                                    | 
| | Other
  receivables                                    | 
| | Receivables
  for work
      in progress               | 
| | Inventories                                            | 
| | Affiliated
  company designated for sale               | 
| |                                                        | 
| |                                                        | 
| |                                                        | 
| |                                                        | 
| | Non-current inventories                                | 
| |                                                        | 
| |                                                        | 
| | Investments, long-term loans and
          receivables | 
| | Affiliated
  companies
       and other investments    | 
| | Long-term
  loans                                      | 
| | Deferred
  taxes, net                                  | 
| |                                                        | 
| |                                                        | 
| |                                                        | 
| |                                                        | 
| | Fixed assets, net                                      | 
| |                                                        | 
| |                                                        | 
| | Other assets                                           | 
| |                                                        | 
| |                                                        | 
| |                                                        | 
| |                                                        | 

*Reclassified

-72-

---

---

Granite
Hacarmel Investments Limited and its Subsidiaries

|Notes to the Financial Statements
  as at December 31, 2003
|-----------------------------------------------------------
|                                                           

NOTE 32
  Financial statements translated into U.S. dollars (continued)

| | CONSOLIDATED
  BALANCE SHEETS
  (In thousands)                                | 
| | ----------------------------------------------------------------------------- | 
| |                                                                               | 
| |                                                                               | 
| |                                                                               | 
| |                                                                               | 
| |                                                                               | 
| |                                                                               | 
| |                                                                               | 
| |                                                                               | 
| | Current liabilities                                                           | 
| | Credit from banks and others                                                  | 
| | Trade payables                                                                | 
| | Other payables                                                                | 
| |                                                                               | 
| |                                                                               | 
| |                                                                               | 
| |                                                                               | 
| | Long-term liabilities                                                         | 
| | Long-term loans                                                               | 
| | Customers deposits                                                           | 
| | Liabilities for severance pay, net                                            | 
| | Deferred taxes                                                                | 
| |                                                                               | 
| |                                                                               | 
| |                                                                               | 
| |                                                                               | 
| | Minority interest                                                             | 
| |                                                                               | 
| |                                                                               | 
| | Shareholders equity                                                          | 
| | Ordinary shares, NIS 1 par value                                              | 
| | Authorized 225,000,000 shares                                                 | 
| | Issued and outstanding 139,336,000 shares
  as of  December 31, 2003 and 2002 | 
| | Capital reserves                                                              | 
| | Companys shares held by a consolidated   Company                             | 
| | Retained earnings                                                             | 
| | Accumulated other comprehensive income                                        | 
| | Cumulative foreign currency translation   Adjustment                          | 
| |                                                                               | 
| | Total shareholders equity                                                    | 
| |                                                                               | 
| |                                                                               | 
| |                                                                               | 
| |                                                                               | 

*Reclassified

-73-

---

---

Granite
Hacarmel Investments Limited and its Subsidiaries

|Notes to the Financial Statements
  as at December 31, 2003
|-----------------------------------------------------------
|                                                           

NOTE 32
  Financial statements translated into U.S. dollars (continued)

| | CONSOLIDATED
  STATEMENT OF INCOME
  (In thousands except per share data) | 
| | ------------------------------------------------------------------------- | 
| |                                                                           | 
| |                                                                           | 
| |                                                                           | 
| |                                                                           | 
| |                                                                           | 
| |                                                                           | 
| |                                                                           | 
| |                                                                           | 
| |                                                                           | 
| | Sales                                                                     | 
| | Less: Government imposts                                                  | 
| |                                                                           | 
| |                                                                           | 
| | Net sales                                                                 | 
| | Cost of sales                                                             | 
| |                                                                           | 
| | Gross profit                                                              | 
| |                                                                           | 
| |                                                                           | 
| | Selling, general and
   administrative expenses                           | 
| | Depreciation and amortization                                             | 
| |                                                                           | 
| |                                                                           | 
| |                                                                           | 
| |                                                                           | 
| | Income from operations                                                    | 
| |                                                                           | 
| |                                                                           | 
| | Financing expenses, net                                                   | 
| | Other (expenses) income, net                                              | 
| |                                                                           | 
| |                                                                           | 
| |                                                                           | 
| |                                                                           | 
| | (Loss) income before taxes on
  income                                    | 
| | Taxes on income                                                           | 
| |                                                                           | 
| |                                                                           | 
| | (Loss) income after taxes on
  income                                     | 
| |                                                                           | 
| | Companys share in results of
  affiliated companies, net                 | 
| |                                                                           | 
| | Minority interest in the results of
    Subsidiaries                      | 
| |                                                                           | 
| |                                                                           | 
| | Net (loss) income for the year                                            | 
| |                                                                           | 
| |                                                                           | 
| | Net (loss) earnings per ordinary
  share (in U.S. dollars):               | 
| |                                                                           | 
| | Primary and diluted (loss) income                                         | 
| |                                                                           | 

*Reclassified

-74-

---

---

Granite
Hacarmel Investments Limited and its Subsidiaries

|Notes to the Financial Statements
  as at December 31, 2003
|-----------------------------------------------------------
|                                                           

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 |        | Total | 
|-------------------------------------------------------------------- |  | -------------- |  | ------------------ |  | ------------------------------------------------------- | ------ | ------------------- |  | ---------------------------------------------- | - | ---------------------------------------------------------- | ------ | ----- | 
|                                                                     |  |                |  |                    |  |                                                         |        |                     |  |                                                |   |                                                            |        |       | 
|                                                                     |  |                |  |                    |  |                                                         |        |                     |  |                                                |   |                                                            |        |       | 
|Balance as at January 1,
  2001                                      |  | 59,696         |  | 65,042             |  |                                                         | (810   | )                   |  | 1,573                                          |   |                                                            | 865    |       | 
|Changes in 2001:                                                     |  |                |  |                    |  |                                                         |        |                     |  |                                                |   |                                                            |        |       | 
|Net income for
  the year                                            |  | -              |  | -                  |  |                                                         | -      |                     |  | 24,331                                         |   |                                                            | -      |       | 
|Divided paid                                                         |  | -              |  | -                  |  |                                                         | -      |                     |  | (27,934                                        | ) |                                                            | -      |       | 
|Acquisition of
  the Companys
      shares by a subsidiary          |  | -              |  | -                  |  |                                                         | (62    | )                   |  | -                                              |   |                                                            | -      |       | 
|Reclassification
  adjustment for
      gains included in net income |  | -              |  | -                  |  |                                                         | -      |                     |  | -                                              |   |                                                            | (353   | )     | 
|                                                                     |  |                |  |                    |  |                                                         |        |                     |  |                                                |   |                                                            |        |       | 
|                                                                     |  |                |  |                    |  |                                                         |        |                     |  |                                                |   |                                                            |        |       | 
|Balance as at December 31,
  2001                                    |  | 59,696         |  | 65,042             |  |                                                         | (872   | )                   |  | (2,030                                         | ) |                                                            | 512    |       | 
|Changes in 2002:                                                     |  |                |  |                    |  |                                                         |        |                     |  |                                                |   |                                                            |        |       | 
|Net loss for the
  year                                              |  | -              |  | -                  |  |                                                         | -      |                     |  | (1,159                                         | ) |                                                            | -      |       | 
|Acquisition of
  the Companys
      shares by a subsidiary          |  | -              |  | -                  |  |                                                         | (1,234 | )                   |  | -                                              |   |                                                            | -      |       | 
|Unrealized losses on
  securities                                    |  | -              |  | -                  |  |                                                         | -      |                     |  | -                                              |   |                                                            | (1,198 | )     | 
|Foreign currency
  translation
      adjustment                      |  | -              |  | -                  |  |                                                         | -      |                     |  | -                                              |   |                                                            | -      |       | 
|Reclassification
  adjustment for
      gains included in net income |  | -              |  | -                  |  |                                                         | -      |                     |  | -                                              |   |                                                            | (423   | )     | 
|                                                                     |  |                |  |                    |  |                                                         |        |                     |  |                                                |   |                                                            |        |       | 
|                                                                     |  |                |  |                    |  |                                                         |        |                     |  |                                                |   |                                                            |        |       | 
|Balance as December
  31, 2002                                       |  | 59,696         |  | 65,042             |  |                                                         | (2,106 | )                   |  | (3,189                                         | ) |                                                            | (1,109 | )     | 
|Changes in 2002:                                                     |  |                |  |                    |  |                                                         |        |                     |  |                                                |   |                                                            |        |       | 
|Net loss for the
  year                                              |  | -              |  | -                  |  |                                                         | -      |                     |  | (22,079                                        | ) |                                                            | -      |       | 
|Dividend paid                                                        |  | -              |  | -                  |  |                                                         | -      |                     |  | (16,622                                        | ) |                                                            | -      |       | 
|Unrealized losses on
  securities                                    |  | -              |  | -                  |  |                                                         | -      |                     |  | -                                              |   |                                                            | 263    |       | 
|Foreign
  currency translation
      adjustment                      |  | -              |  | -                  |  |                                                         | -      |                     |  | -                                              |   |                                                            | -      |       | 
|Reclassification
  adjustment for
      gains included in net income |  | -              |  | -                  |  |                                                         | -      |                     |  | -                                              |   |                                                            | 80     |       | 
|                                                                     |  |                |  |                    |  |                                                         |        |                     |  |                                                |   |                                                            |        |       | 
|                                                                     |  |                |  |                    |  |                                                         |        |                     |  |                                                |   |                                                            |        |       | 
|Balance as December
  31, 2003                                       |  | 59,696         |  | 65,042             |  |                                                         | (2,106 | )                   |  | (41,890                                        | ) |                                                            | (766   | )     | 
|                                                                     |  |                |  |                    |  |                                                         |        |                     |  |                                                |   |                                                            |        |       | 

*     Deriving
from unrealized gains (losses) on marketable securities, net of tax effect.

-75-

---

---

Granite
Hacarmel Investments Limited and its Subsidiaries

|Notes to the Financial Statements
  as at December 31, 2003
|-----------------------------------------------------------
|                                                           

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)                                                                                                          
| |                                                                                                             
| |                                                                                                             
| |                                                                                                             
| |                                                                                                             
| |                                                                                                             
| |                                                                                                             
| |                                                                                                             
| |                                                                                                             
| | b)                                                                                                          
| |                                                                                                             
| |                                                                                                             
| |                                                                                                             
| |                                                                                                             
| |                                                                                                             
| |                                                                                                             
| |                                                                                                             
| |                                                                                                             
| |                                                                                                             
| |                                                                                                             
| |                                                                                                             
| |                                                                                                             
| |                                                                                                             

-76-

---

---

Granite Hacarmel Investments Limited
and its Subsidiaries

|Notes to the Financial Statements
  as at December 31, 2003
|-----------------------------------------------------------
|                                                           

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 goodwill                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | In 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) | Impairment of Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | In accordance with Israeli GAAP:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | The
  Company applied Standard No. 15 under which the Company needs to test the
  recoverable amount of the assets, which is the higher of the net sales price
  and usage value.  A loss from
  impairment will be reversed only if changes have occurred in the estimates
  used in determining the recoverable value of the asset, from the date of
  which the last impairment was recognized.                                                                                                                                                                                                                                                                                                                                                                                         

-77-

---

---

Granite Hacarmel Investments Limited
and its Subsidiaries

|Notes to the Financial Statements
  as at December 31, 2003
|-----------------------------------------------------------
|                                                           

NOTE 32   Financial statements
translated Into U.S. dollars (continued)

| |    |                                                                                                    | In accordance with US GAAP:                                                                                                                            
| | -- | -------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                    |                                                                                                                                                        
| |    |                                                                                                    | The
  Company applied FAS 144 with respect to long-lived assets and APB 18 with
  respect to equity method investees.                                  
| |    |                                                                                                    | Under
  FAS 144 an impairment of long-lived asset is recorded only if the
  undiscounted cash flows of the related asset does not cover its book value.
| |    |                                                                                                    |                                                                                                                                                        
| |    |                                                                                                    | Under
  APB 18 a loss is recorded only when the impairment investees is other than
  temporary.                                                        
| |    |                                                                                                    | Both
  under FAS 144 and under APB 18 reversals of impairments are not allowed,
  unless the assets are held for sales.                                
| |    |                                                                                                    |                                                                                                                                                        
| | e) | Other disclosures                                                                                 
| |    | Government imposts
  consist of excise taxes imposed on fuel products mainly gasoline and gasoil.

-78-

---

---

Granite
Hacarmel Investments Limited and its Subsidiaries

|Notes to the Financial Statements
  as at December 31, 2003
|-----------------------------------------------------------
|                                                           

LIST OF
MAIN INVESTEE COMPANIES

|List
  of the main subsidiaries and affiliates |                                                          | Holdings and
  Control as of
  December 31,2003 |      
|---------------------------------------------- | -------------------------------------------------------- | ----------------------------------------------- | -----
|                                               |                                                          |                                                 |      
|                                               |                                                          | %                                               |      
|                                               |                                                          |                                                 |      
|                                               | Consolidated Subsidiaries:                               |                                                 |      
|                                               | Sonol Israel Ltd.                                        |                                                 | 100  
|                                               | Sprint Motors Ltd.                                       |                                                 | 100  
|                                               |                                                          |                                                 |      
|                                               | Milchen Sonol Agency Ltd.                                |                                                 | 66.67
|                                               | Sonol J-M Ltd.                                           |                                                 | 70   
|                                               | Sonol Dan (1992) Ltd.                                    |                                                 | 100  
|                                               | Sonol Darom Ltd.                                         |                                                 | 100  
|                                               | Sonol Cnaan Ltd                                          |                                                 | 51   
|                                               | Sonol Shani Agencies Ltd.                                |                                                 | 51   
|                                               | Sprint Motors Transport (1999) Ltd.                      |                                                 | 100  
|                                               | Kleesson Holdings (1999) Ltd.                            |                                                 | 100  
|                                               | Sonor Ltd.                                               |                                                 | 100  
|                                               | After Holdings Ltd.                                      |                                                 | 100  
|                                               | Granita Holdings Ltd.                                    |                                                 | 75   
|                                               | Granite-Sonol Oil and Gas Drilling-Limited
  Partnership |                                                 | 100  
|                                               | Tambour Ltd.                                             |                                                 | 100  
|                                               | Tambour Ecology Ltd.                                     |                                                 | 100  
|                                               | Tambourechev Paints1997 Ltd.                             |                                                 | 100  
|                                               | Safety Kleen (Israel) Ltd.                               |                                                 | 100  
|                                               | Tzach Serafon Ltd.                                       |                                                 | 100  
|                                               | Serafon Trading 1997 Ltd.                                |                                                 | 100  
|                                               | Tambour Distribution Ltd.                                |                                                 | 100  
|                                               | Texma Chemicals Ltd.                                     |                                                 | 100  
|                                               | Supergas Israel Gas Distribution Company Ltd.            |                                                 | 100  
|                                               | Supergas Hanegev Ltd.                                    |                                                 | 65   
|                                               | Supergas Rehovot (1989) Ltd.                             |                                                 | 100  
|                                               | M. Solomon & Co. Gas Agencies Ashkelon Ltd.              |                                                 | 51   
|                                               | Supergas Hagalil Ltd.                                    |                                                 | 100  
|                                               | Rav Gas Ltd.                                             |                                                 | 55   
|                                               | Allied Oils and Chemicals Ltd.                           |                                                 | 100  
|                                               | Sonefco Bank Street Corporation                          |                                                 | 100  
|                                               | Granite Hacarmel Holdings (1993) Ltd.                    |                                                 | 100  
|                                               | Granite Hacarmel Properties (1993) Ltd.                  |                                                 | 100  
|                                               | Granite Hacarmel Holdings and Development Ltd            |                                                 | 100  
|                                               | Granite Hacarmel Industries Ltd.                         |                                                 | 100  
|                                               | Granite Hacarmel Y.A. Holdings Ltd.                      |                                                 | 100  
|                                               | Granite Hacarmel NZV Holdings Ltd.                       |                                                 | 100  
|                                               | Granite Hacarmel Energy (1997) Ltd.                      |                                                 | 100  
|                                               | Granite Hacarmel Tourism Ltd.                            |                                                 | 100  
|                                               | Otzem Promotion and Investments (1991) Ltd.              |                                                 | 100  

-79-

---

---

Granite
Hacarmel Investments Limited and its Subsidiaries

|Notes to the Financial Statements
  as at December 31, 2003
|-----------------------------------------------------------
|                                                           

|List
  of the main subsidiaries and affiliates (cont.) |                                                                                              | Holdings and
  Control as of
  December 31, 2003 |      
|------------------------------------------------------ | -------------------------------------------------------------------------------------------- | ------------------------------------------------ | -----
|                                                       |                                                                                              |                                                  |      
|                                                       |                                                                                              | %                                                |      
|                                                       |                                                                                              |                                                  |      
|                                                       |                                                                                              |                                                  |      
|                                                       | Affiliated Companies                                                                         |                                                  |      
|                                                       |                                                                                              |                                                  |      
|                                                       | Aero Echo Ltd.                                                                               |                                                  | 33.33
|                                                       | International Ilios                                                                          |                                                  | 43   
|                                                       | Via Maris  Joint Venture                                                                    |                                                  | 24   
|                                                       | Via Maris Desalinization Ltd.                                                                |                                                  | 26.5 
|                                                       | Tambour  Hefer  
  Ecology  Partnership                                                    |                                                  | 50   
|                                                       | Yarok Az Ltd.                                                                                |                                                  | 22.9 
|                                                       | Nitzba Holdings 1995 Ltd.                                                                    |                                                  | 9.82 
|                                                       | Orpak Industries (1983)Ltd.                                                                  |                                                  | 10.1 
|                                                       | Park Mini Israel  Limited Partnership                                                       |                                                  | 35   
|                                                       | L.D.I.-Leasing Dynamics International Ltd.                                                   |                                                  | 25.1 
|                                                       | Green Anchors Ltd.                                                                           |                                                  | 50   
|                                                       |                                                                                              |                                                  |      
|                                                       | The above list does not include inactive and/or
  immaterial affiliated companies and others |                                                  |      

-80-



---

---



OPHIR HOLDINGS LTD.(An Israeli Corporation)
2005 ANNUAL REPORT



---

---



OPHIR HOLDINGS LTD.

2005 ANNUAL REPORT

TABLE OF CONTENTS

|                                                |  |     
|----------------------------------------------- |  | ----
|                                                |  | Page
|REPORT OF INDEPENDENT AUDITORS                  |  | 2   
|CONSOLIDATED FINANCIAL STATEMENTS:              |  |     
|Balance sheets                                  |  | 3-4 
|Statements of income
(loss)                     |  | 5   
|Statements of changes in
shareholders
  equity |  | 6   
|Statements of cash
flows                        |  | 7-8 
|Notes to financial
statements                   |  | 9-32

---

---



REPORT OF INDEPENDENT
AUDITORS

To the
shareholders of

OPHIR HOLDINGS LTD.

We have
audited the consolidated financial statements of Ophir Holdings Ltd. and its
subsidiaries (the Company): balance sheets as of December 31, 2005 and
2004 and the related statements of income, changes in shareholders equity and
cash flows for each of the three years in the period ended December 31,
2005. These financial statements are the responsibility of the Companys Board
of Directors and management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2005 and 2004 and the consolidated results of operations and
cash flows of
the Company for each of the three years in the period ended
December 31, 2005, in conformity with accounting principles generally
accepted in the United States of America.

As explained
in note 1b, the financial statements, as of dates and for reporting periods
subsequent to December 31, 2003, are presented in New Israeli Shekels, in
conformity with accounting standards issued by the Israel Accounting Standards
Board. The financial statements as of dates and for reporting periods ended
prior to, or on the above date, are presented in values that have been adjusted
for the changes in the general purchasing power of the Israeli currency,
through that date, in accordance with pronouncements of the Institute of
Certified Public Accountants in Israel.

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

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

2

---

---



OPHIR HOLDINGS LTD.

CONSOLIDATED BALANCE SHEETS

|                                                |  |  |         |  |                                  |         |      |  |         | 
|----------------------------------------------- |  |  | ------- |  | -------------------------------- | ------- | ---- |  | ------- | 
|                                                |  |  |         |  | December 31                      |        
|                                                |  |  |         |  |                                  |        
|                                                |  |  | Note    |  | 2005                             |         | 2004 | 
|                                                |  |  |         |  |                                  |         |      | 
|                                                |  |  |         |  | NIS in thousands
  (see note 1b) |        
|                                                |  |  |         |  |                                  |        
|                                               
|A s s e t s                                     |  |  |         |  |                                  |         |      |  |         | 
|CURRENT ASSETS :                                |  |  | 12      |  |                                  |         |      |  |         | 
|Cash and cash equivalents                       |  |  | 1k      |  |                                  | 2,396   |      |  | 2,894   | 
|Short term investments                          |  |  | 4a      |  |                                  | 25,018  |      |  | 86,935  | 
|Accounts receivable:                            |  |  | 13a     |  |                                  |         |      |  |         | 
|Realated parties                                |  |  |         |  |                                  | 54,952  |      |  | 151     | 
|Other                                           |  |  |         |  |                                  | 11,062  |      |  | 4,853   | 
|                                                |  |  |         |  |                                  |         |      |  |         | 
|T o t a l  current assets                       |  |  |         |  |                                  | 93,428  |      |  | 94,833  | 
|                                                |  |  |         |  |                                  |         |      |  |         | 
|LAND - BUSINESS INVENTORY                       |  |  | 1e;8(2) |  |                                  | 13,048  |      |  | 13,048  | 
|                                                |  |  |         |  |                                  |         |      |  |         | 
|INVESTMENTS:                                    |  |  |         |  |                                  |         |      |  |         | 
|Associated companies                            |  |  | 3       |  |                                  | 157,248 |      |  | 187,275 | 
|Other companies                                 |  |  | 4;8     |  |                                  | 1,387   |      |  | 72,854  | 
|Loan to related party                           |  |  | 11b     |  |                                  | 8,306   |      |  | 8,114   | 
|                                                |  |  |         |  |                                  |         |      |  |         | 
|                                                |  |  |         |  |                                  | 166,941 |      |  | 268,243 | 
|                                                |  |  |         |  |                                  |         |      |  |         | 
|                                                |  |  |         |  |                                  |         |      |  |         | 
|FIXED ASSETS, net of
  accumulated depreciation |  |  | 5       |  |                                  |         |      |  | 57,425  | 
|                                                |  |  |         |  |                                  |         |      |  |         | 
|                                                |  |  |         |  |                                  | 273,417 |      |  | 433,549 | 
|                                                |  |  |         |  |                                  |         |      |  |         | 

|          |   |              
|--------- | - | -------------
|          | ( |              
|          |   |              
|          | ( | Avi Israel   
|DIRECTORS | ( |              
|          | ( |              
|          |   |              
|          | ( | Giora Bar-Nir

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

3

---

---



|                                                                  |  |  |      |  |                                  |         |      |  |         | 
|----------------------------------------------------------------- |  |  | ---- |  | -------------------------------- | ------- | ---- |  | ------- | 
|                                                                  |  |  |      |  | December 31                      |        
|                                                                  |  |  |      |  |                                  |        
|                                                                  |  |  | Note |  | 2005                             |         | 2004 | 
|                                                                  |  |  |      |  |                                  |         |      | 
|                                                                  |  |  |      |  | NIS in thousands
  (see note 1b) |        
|                                                                  |  |  |      |  |                                  |        
|                                                                  |  |  |      |  |                                  |         |      |  |         | 
|Liabilities and shareholders
equity                              |  |  |      |  |                                  |         |      |  |         | 
|CURRENT LIABILITIES:                                              |  |  | 12   |  |                                  |         |      |  |         | 
|Bank credit and loans (mainly current
  maturities)               |  |  | 13b  |  |                                  | 3,834   |      |  | 8,383   | 
|Accounts payable and accruals                                     |  |  | 13c  |  |                                  | 4,245   |      |  | 4,121   | 
|                                                                  |  |  |      |  |                                  |         |      |  |         | 
|T o t a l  current liabilities                                    |  |  |      |  |                                  | 8,079   |      |  | 12,504  | 
|                                                                  |  |  |      |  |                                  |         |      |  |         | 
|LONG-TERM LIABILITIES:                                            |  |  | 12   |  |                                  |         |      |  |         | 
|Bank loans (net of current maturities)                            |  |  | 6    |  |                                  | 22,552  |      |  | 58,675  | 
|Capital notes to an associated company                            |  |  | 7    |  |                                  | 151,601 |      |  | 151,601 | 
|Capital note to related party                                     |  |  | 7    |  |                                  | 1,069   |      |  | 1,069   | 
|Payables in respect of acquisition of land
  - business inventory |  |  | 8(2) |  |                                  | 11,894  |      |  | 11,843  | 
|Deferred income taxes                                             |  |  | 10b  |  |                                  |         |      |  | 2,550   | 
|                                                                  |  |  |      |  |                                  |         |      |  |         | 
|T o t a l  long-term liabilities                                  |  |  |      |  |                                  | 187,116 |      |  | 225,738 | 
|                                                                  |  |  |      |  |                                  |         |      |  |         | 
|T o t a l  liabilities                                            |  |  |      |  |                                  | 195,195 |      |  | 238,242 | 
|                                                                  |  |  |      |  |                                  |         |      |  |         | 
|COMMITMENTS                                                       |  |  | 8    |  |                                  |         |      |  |         | 
|MINORITY INTEREST                                                 |  |  |      |  |                                  | 25      |      |  | 25      | 
|SHAREHOLDERS EQUITY                                              |  |  | 9    |  |                                  | 78,197  |      |  | 195,282 | 
|                                                                  |  |  |      |  |                                  |         |      |  |         | 
|                                                                  |  |  |      |  |                                  | 273,417 |      |  | 433,549 | 
|                                                                  |  |  |      |  |                                  |         |      |  |         | 

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

4

---

---



OPHIR HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

|                                                                        |  |  |         |  |                                  |         |      |  |        |   |  |        |  
|----------------------------------------------------------------------- |  |  | ------- |  | -------------------------------- | ------- | ---- |  | ------ | - |  | ------ | -
|                                                                        |  |  | Note    |  | 2005                             |         | 2004 |  | 2003   |  
|                                                                        |  |  |         |  |                                  |         |      |  |        |  
|                                                                        |  |  |         |  | NIS in
  thousands (see note 1b) |        
|                                                                        |  |  |         |  |                                  |        
|REVENUES AND GAINS:                                                     |  |  |         |  |                                  |         |      |  |        |   |  |        |  
|From lease of buildings                                                 |  |  |         |  |                                  | 3,649   |      |  | 6,737  |   |  | 10,278 |  
|Share in profits (losses) of associated
  companies - net               |  |  | 3       |  |                                  | 651     |      |  | (1,150 | ) |  | (2,071 | )
|Gain from sale and increase in value of
  marketable securities- net    |  |  |         |  |                                  | 1,815   |      |  | 2,183  |   |  | 164    |  
|Dividend received from other companies                                  |  |  |         |  |                                  | 79      |      |  | 11,623 |   |  | 7,896  |  
|Management fees from associated company and
  others                    |  |  | 11a     |  |                                  |         |      |  | 433    |   |  | 438    |  
|Others                                                                  |  |  |         |  |                                  | 240     |      |  | 2,141  |   |  | 120    |  
|                                                                        |  |  |         |  |                                  |         |      |  |        |   |  |        |  
|                                                                        |  |  |         |  |                                  | 6,434   |      |  | 21,967 |   |  | 16,825 |  
|                                                                        |  |  |         |  |                                  |         |      |  |        |   |  |        |  
|EXPENSES AND LOSSES:                                                    |  |  |         |  |                                  |         |      |  |        |   |  |        |  
|Operating cost of leased buildings
  (including depreciation)           |  |  |         |  |                                  | 1,909   |      |  | 2,703  |   |  | 3,613  |  
|Impairment of investments in associated
  companies and other companies |  |  | 3;4     |  |                                  | 4,571   |      |  | 950    |   |  |        |  
|General and administrative expenses - net                               |  |  | 11a     |  |                                  | 2,314   |      |  | 1,480  |   |  | 4,623  |  
|Loss from sale of investments in associated
  companies                 |  |  |         |  |                                  | 1,618   |      |  |        |   |  |        |  
|Loss (gain) from sale of real estate                                    |  |  |         |  |                                  | 7,519   |      |  | (535   | ) |  | 30     |  
|Financial expenses (income) - net                                       |  |  | 11a;13f |  |                                  | (183    | )    |  | 700    |   |  | 1,532  |  
|Others                                                                  |  |  |         |  |                                  | 106     |      |  |        |   |  |        |  
|                                                                        |  |  |         |  |                                  |         |      |  |        |   |  |        |  
|                                                                        |  |  |         |  |                                  | 17,854  |      |  | 5,298  |   |  | 9,798  |  
|                                                                        |  |  |         |  |                                  |         |      |  |        |   |  |        |  
|INCOME (LOSS) BEFORE TAXES ON INCOME                                    |  |  |         |  |                                  | (11,420 | )    |  | 16,669 |   |  | 7,027  |  
|TAXES ON INCOME (TAX SAVING)                                            |  |  | 10c     |  |                                  | (5,255  | )    |  | 2,374  |   |  | 4,731  |  
|                                                                        |  |  |         |  |                                  |         |      |  |        |   |  |        |  
|INCOME (LOSS) AFTER TAXES ON INCOME(TAX
  SAVING)                       |  |  |         |  |                                  | (6,165  | )    |  | 14,295 |   |  | 2,296  |  
|MINORITY INTEREST SHARE IN LOSSES OF A
  SUBSIDIARY                     |  |  |         |  |                                  |         |      |  | 1      |   |  | 15     |  
|                                                                        |  |  |         |  |                                  |         |      |  |        |   |  |        |  
|NET INCOME (LOSS) FOR THE YEAR                                          |  |  |         |  |                                  | (6,165  | )    |  | 14,296 |   |  | 2,311  |  
|                                                                        |  |  |         |  |                                  |         |      |  |        |   |  |        |  

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

5

---

---



OPHIR HOLDINGS LTD.

STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

|                                                                              |  |                                |       |                   |  |                                                              |   |                     |         |       |  |         |   |  |          |  
|----------------------------------------------------------------------------- |  | ------------------------------ | ----- | ----------------- |  | ------------------------------------------------------------ | - | ------------------- | ------- | ----- |  | ------- | - |  | -------- | -
|                                                                              |  | Share
  capital                |       | Capital
  surplus |  | Dividend
  Declared
  Subsequent
  to balance
  sheet
  Date |   | Retained
  earnings |         | Total | 
|                                                                              |  |                                |       |                   |  |                                                              |   |                     |         |       | 
|                                                                              |  | NIS in thousands (see note 1b) |      
|                                                                              |  |                                |      
|                                                                              |  |                                |       |                   |  |                                                              |   |                     |         |       |  |         |   |  |          |  
|BALANCE AT JANUARY 1, 2003                                                    |  |                                | 2,832 |                   |  | 80,488                                                       |   |                     |         |       |  | 139,375 |   |  | 222,695  |  
|CHANGES DURING 2003:                                                          |  |                                |       |                   |  |                                                              |   |                     |         |       |  |         |   |  |          |  
|Net income                                                                    |  |                                |       |                   |  |                                                              |   |                     |         |       |  | 2,311   |   |  | 2,311    |  
|Dividend paid                                                                 |  |                                |       |                   |  |                                                              |   |                     |         |       |  | (14,000 | ) |  | (14,000  | )
|Erosion of capital note                                                       |  |                                |       |                   |  | (20                                                          | ) |                     |         |       |  |         |   |  | (20      | )
|                                                                              |  |                                |       |                   |  |                                                              |   |                     |         |       |  |         |   |  |          |  
|BALANCE AT DECEMBER 31, 2003                                                  |  |                                | 2,832 |                   |  | 80,468                                                       |   |                     |         |       |  | 127,686 |   |  | 210,986  |  
|CHANGES DURING 2004:                                                          |  |                                |       |                   |  |                                                              |   |                     |         |       |  |         |   |  |          |  
|Net income                                                                    |  |                                |       |                   |  |                                                              |   |                     |         |       |  | 14,296  |   |  | 14,296   |  
|Dividend paid                                                                 |  |                                |       |                   |  |                                                              |   |                     |         |       |  | (30,000 | ) |  | (30,000  | )
|Appropriation for distribution of dividend
  subsequent to balance sheet date |  |                                |       |                   |  |                                                              |   |                     | 90,830  |       |  | (90,830 | ) |  |          |  
|                                                                              |  |                                |       |                   |  |                                                              |   |                     |         |       |  |         |   |  |          |  
|BALANCE AT DECEMBER 31, 2004                                                  |  |                                | 2,832 |                   |  | 80,468                                                       |   |                     | 90,830  |       |  | 21,152  |   |  | 195,282  |  
|CHANGES DURING 2005:                                                          |  |                                |       |                   |  |                                                              |   |                     |         |       |  |         |   |  |          |  
|Net loss                                                                      |  |                                |       |                   |  |                                                              |   |                     |         |       |  | (6,165  | ) |  | (6,165   | )
|Dividend paid (In kind and in cash)                                           |  |                                |       |                   |  | (5,103                                                       | ) |                     | (90,830 | )     |  | (14,987 | ) |  | (110,920 | )
|Appropriation for distribution of dividend
  subsequent to balance sheet date |  |                                |       |                   |  | (55,000                                                      | ) |                     | 55,000  |       |  |         |   |  |          |  
|                                                                              |  |                                |       |                   |  |                                                              |   |                     |         |       |  |         |   |  |          |  
|BALANCE AT DECEMBER 31, 2005                                                  |  |                                | 2,832 |                   |  | 20,365                                                       |   |                     | 55,000  |       |  | -,-     |   |  | 78,197   |  
|                                                                              |  |                                |       |                   |  |                                                              |   |                     |         |       |  |         |   |  |          |  

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

6

---

---



(Continued) - 1

OPHIR HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                 |  |                                  |          |      |  |         |   |  |         |  
|------------------------------------------------------------------------------------------------ |  | -------------------------------- | -------- | ---- |  | ------- | - |  | ------- | -
|                                                                                                 |  | 2005                             |          | 2004 |  | 2003    |  
|                                                                                                 |  |                                  |          |      |  |         |  
|                                                                                                 |  | NIS in
  thousands (see note 1b) |         
|                                                                                                 |  |                                  |         
|                                                                                                
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                            |  |                                  |          |      |  |         |   |  |         |  
|Net income (loss) for the year                                                                   |  |                                  | (6,165   | )    |  | 14,296  |   |  | 2,311   |  
|Adjustments to reconcile net income (loss)
  to net cash flows provided by operating activities* |  |                                  | 8,820    |      |  | (3,032  | ) |  | 3,703   |  
|                                                                                                 |  |                                  |          |      |  |         |   |  |         |  
|Net cash provided by operating activities                                                        |  |                                  | 2,655    |      |  | 11,264  |   |  | 6,014   |  
|                                                                                                 |  |                                  |          |      |  |         |   |  |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                            |  |                                  |          |      |  |         |   |  |         |  
|Proceeds from sale of investments in other
  companies and trading securities                    |  |                                  | 74,923   |      |  | 21,242  |   |  |         |  
|Proceed from sale of Associated Company                                                          |  |                                  | 32,564   |      |  |         |   |  |         |  
|Proceed from sale of leased buildings,
net                                                       |  |                                  | 42,397   |      |  | 7,847   |   |  | 30,190  |  
|Investment in associated companies
  (including capital notes and loans - net)                   |  |                                  | (746     | )    |  | (499    | ) |  | (424    | )
|Investments in other companies                                                                   |  |                                  | (496     | )    |  | (549    | ) |  | (301    | )
|Purchase of short term investments, net                                                          |  |                                  | (24,707  | )    |  | (196    | ) |  |         |  
|Other                                                                                            |  |                                  |          |      |  | 1,935   |   |  | (72     | )
|                                                                                                 |  |                                  |          |      |  |         |   |  |         |  
|Net cash provided by investing activities                                                        |  |                                  | 123,935  |      |  | 29,780  |   |  | 29,393  |  
|                                                                                                 |  |                                  |          |      |  |         |   |  |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                            |  |                                  |          |      |  |         |   |  |         |  
|Repayment of long-term bank loans- net                                                           |  |                                  | (42,172  | )    |  | (8,382  | ) |  | (8,307  | )
|Related parties                                                                                  |  |                                  | (55,000  | )    |  |         |   |  |         |  
|Dividend paid                                                                                    |  |                                  | (29,990  | )    |  | (32,953 | ) |  | (11,047 | )
|Short-term bank credit and loans - net                                                           |  |                                  | 74       |      |  | (30     | ) |  | (13,254 | )
|                                                                                                 |  |                                  |          |      |  |         |   |  |         |  
|Net cash used in financing activities                                                            |  |                                  | (127,088 | )    |  | (41,365 | ) |  | (32,608 | )
|                                                                                                 |  |                                  |          |      |  |         |   |  |         |  
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                 |  |                                  | (498     | )    |  | (321    | ) |  | 2,799   |  
|BALANCE OF CASH AND CASH EQUIVALENTS AT
  BEGINNING OF YEAR                                      |  |                                  | 2,894    |      |  | 3,215   |   |  | 416     |  
|                                                                                                 |  |                                  |          |      |  |         |   |  |         |  
|BALANCE OF CASH AND CASH EQUIVALENTS AT END
  OF YEAR                                            |  |                                  | 2,396    |      |  | 2,894   |   |  | 3,215   |  
|                                                                                                 |  |                                  |          |      |  |         |   |  |         |  

7

---

---



(Concluded) - 2

OPHIR HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                   |  |                                  |        |      |  |        |   |  |        |  
|-------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | ---- |  | ------ | - |  | ------ | -
|                                                                                                   |  | 2005                             |        | 2004 |  | 2003   |  
|                                                                                                   |  |                                  |        |      |  |        |  
|                                                                                                   |  | NIS in
  thousands (see note 1b) |       
|                                                                                                   |  |                                  |       
|                                                                                                  
|* Adjustments to reconcile net income
  (loss) to net cash flows provided by operating activities: |  |                                  |        |      |  |        |   |  |        |  
|Income and expenses not involving cash
  flows:                                                    |  |                                  |        |      |  |        |   |  |        |  
|Share in losses (profits) of associated
  companies - net                                          |  |                                  | (651   | )    |  | 1,150  |   |  | 2,071  |  
|Depreciation                                                                                       |  |                                  | 729    |      |  | 1,459  |   |  | 1,953  |  
|Deferred income taxes - net                                                                        |  |                                  | (2,550 | )    |  | (126   | ) |  | 2,971  |  
|Minority interest in losses of a
subsidiary                                                        |  |                                  |        |      |  | (1     | ) |  | 15     |  
|Loss (gain) from sale of fixed assets -
net                                                        |  |                                  | 7,519  |      |  | (535   | ) |  | (90    | )
|Gain from sale and increase in value of marketable
  securities - net                              |  |                                  | (1,815 | )    |  | (2,183 | ) |  | (164   | )
|Loss from sale of associated companies                                                             |  |                                  | 1,618  |      |  |        |   |  |        |  
|Gain from sale of investment in other
  company                                                    |  |                                  |        |      |  | (305   | ) |  |        |  
|Impairment (reversal of impairment) of
  investment in associated companies and others - net       |  |                                  | 4,571  |      |  | (873   | ) |  |        |  
|Linkage differences (erosion) on long-term
  bank loans- net                                       |  |                                  | 1,426  |      |  | 676    |   |  | (67    | )
|Linkage differences and interest on loans
  to associated companies and others                     |  |                                  | (1,770 | )    |  | (1,604 | ) |  | (1,497 | )
|                                                                                                   |  |                                  |        |      |  |        |   |  |        |  
|                                                                                                   |  |                                  | 9,077  |      |  | (2,342 | ) |  | 5,192  |  
|                                                                                                   |  |                                  |        |      |  |        |   |  |        |  
|Changes in operating asset and liability
  items:                                                  |  |                                  |        |      |  |        |   |  |        |  
|Decrease (increase) in accounts
receivable                                                         |  |                                  | 1,370  |      |  | (369   | ) |  | 1,677  |  
|Decrease in accounts payable and accruals                                                          |  |                                  | (1,627 | )    |  | (321   | ) |  | (3,166 | )
|                                                                                                   |  |                                  |        |      |  |        |   |  |        |  
|                                                                                                   |  |                                  | (257   | )    |  | (690   | ) |  | (1,489 | )
|                                                                                                   |  |                                  |        |      |  |        |   |  |        |  
|                                                                                                   |  |                                  | 8,820  |      |  | (3,032 | ) |  | 3,703  |  
|                                                                                                   |  |                                  |        |      |  |        |   |  |        |  

Supplementary
information on investing and financing activities not involving cash flows:

|   |                                                                                                                                                                                                                                                                                     
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a. | As resolved by the board of directors on
  February 9, 2005, the Company distributed the remaining shares in Industrial
  Buildings to its shareholders, as a quasi-dividend in the amount of
  NIS 80,930 thousands.                                                               
|   |                                                                                                                                                                                                                                                                                     
|b. | The balance of receivables includes an
  amount of NIS 6,780 thousands, which is deposited in a trust account, in
  respect of the sale of a building. This balance was not reflected within the
  framework of investing activities in the statement of cash flows.                
|   |                                                                                                                                                                                                                                                                                     
|c. | The balance of receivables includes an
  amount of NIS 3,500 thousands, in respect of the sale of buildings for
  rent, which were sold during 2003. This balance was not reflected in the
  statements of cash flows in 2003, and will be included at the time of its
  settlement.

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

8

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS

|           |                                                                                         |          |                                                                                                                                                                                                         
|---------- | --------------------------------------------------------------------------------------- | -------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES                                                        
|           |                                                                                        
|           | The
  significant accounting policies, applied on a consistent basis, are as
  follows:
|           |                                                                                         |          |                                                                                                                                                                                                         
|           | a.                                                                                      | General:
|           |                                                                                         |          |                                                                                                                                                                                                         
|           |                                                                                         | 1)       | Ophir
  Holdings Ltd. (the Company) is a holding and investment company.                                                                                                                              
|          
|           |                                                                                         |          | The
  subsidiary Merkazim Investments Ltd. is engaged in the renting of commercial
  buildings. In 2003, this company sold all its holdings in the commercial
  buildings that were designated for rent.
|           |                                                                                         |          |                                                                                                                                                                                                         
|           |                                                                                         |          | The
  subsidiary, New Horizons (1993) Ltd., holds a number of real estates
  (designated for sale), which were purchased from a related party, see also
  note 8(2).                                    
|           |                                                                                         |          |                                                                                                                                                                                                         
|           |                                                                                         |          | As to the
  activities of the associated companies, see note 3c.                                                                                                                                        
|           |                                                                                         |          |                                                                                                                                                                                                         
|           |                                                                                         | 2)       | Definitions:                                                                                                                                                                                            

| |    |                                                                                                                                                                                                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Subsidiary -                                                                                                                                                                                                                                                                                                                                                                         |  | a company
  controlled or owned to the extent of over 50%, the financial statements of
  which have been consolidated with the financial statements of the Company.                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Associated
  company -                                                                                                                                                                                                                                                                                                                                                               |  | a company
  controlled to the extent of 20% or over (which is not a subsidiary), or a
  company less than 20% controlled which complies with the condition relating
  to significant influence, as prescribed by Opinion 68 of the Institute of
  Certified Public Accountants in Israel (the Israeli Institute), the
  investment in which is presented by the equity method.
| |    |                                                                                                                                                                                                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Other
  company -                                                                                                                                                                                                                                                                                                                                                                    |  | a company to
  which the conditions specified in the preceding paragraphs do not apply.                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The Group -                                                                                                                                                                                                                                                                                                                                                                          |  | the Company,
  its subsidiaries and its associated companies.                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Related
  parties -                                                                                                                                                                                                                                                                                                                                                                  |  | as defined
  in Opinion 29 of the Israeli Institute.                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                   
| | 3) | Principles
  of accounting                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                     
| |    | The
  consolidated financial statements have been prepared in accordance with
  accounting principles generally accepted in Israel (Israeli GAAP). Israeli
  GAAP vary in certain significant respects from accounting principles
  generally accepted in the United States of America. Information relating to
  the nature and effect of such differences is presented in note 14.

9

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|           |                                             |                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|---------- | ------------------------------------------- | -------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES(continued):
|           |                                             |                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           | b.                                          | Financialstatements presentation basis:                                                                 
|           |                                             |                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                             | The Company
  draws up and presents its financial statements in Israeli currency (shekels
  or NIS).
|           |                                             |                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                             | 1)                                                                                                       | Transition
  to nominal financial reporting in 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                             |                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                             |                                                                                                          | With effect
  from January 1, 2004, the Company has adopted the provisions of Israel
  Accounting Standard No. 12 - Discontinuance of Adjusting Financial
  Statements for Inflation - of the Israel Accounting Standards Board (the
  IASB) and, pursuant thereto, the Company has discontinued, from the
  aforesaid date, the adjustment of its financial statements for the effects of
  inflation in Israel.                                                                                                                                                                                                                                                                                            
|           |                                             |                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                             |                                                                                                          | The amounts
  adjusted for the effects of inflation in Israel (see 2 below), presented in
  the financial statements as of December 31, 2003 (the transition
  date), were used as the opening balances for the nominal financial reporting
  in the following periods. Additions made after the transition date have been
  included in the financial statements at their nominal values.                                                                                                                                                                                                                                                                                                                     
|           |                                             |                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                             |                                                                                                          | Accordingly,
  the amounts reported in 2005 and 2004 are composed as follows: amounts
  originating from the period that preceded the transition date are composed of
  their adjusted to December 2003 shekel amount, with the addition of amounts
  in nominal values that were added after the transition date, and net of
  amounts that were deducted after the transition date (the retirement of such
  sums is effected at their adjusted values as of transition date, their
  nominal values, or a combination of the two, according to the circumstances).
  All the amounts originating from the period after the transition date are
  included in the financial statements at their nominal values.
|           |                                             |                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                             | 2)                                                                                                       | Comparative
  figures - amounts adjusted to end of 2004 shekels                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                             |                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                             |                                                                                                          | Through
  December 31, 2003, the Company prepared its financial statements on the
  basis of historical cost adjusted for the changes in the general purchasing
  power of Israeli currency (NIS), based upon changes in the consumer price
  index (the CPI), in accordance with pronouncements of the Israeli
  Institute. The comparative figures included in these financial statements are
  based on the amounts included for the prior reporting periods, as adjusted
  for the changes in the general purchasing power of the Israeli currency,
  based on the CPI for December 2003 (the CPI in effect at the transition
  date).                                                                     
|           |                                             |                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                             |                                                                                                          | The
  components of the income statements were, for the most part, adjusted as
  follows: the components relating to transactions carried out during the
  reported period - revenues, expenses, etc. - were adjusted on the basis of
  the index for the month in which the transaction was carried out, while those
  relating to non-monetary balance sheet items (mainly - depreciation) were
  adjusted on the same basis as the related balance sheet item. The financing
  component represents financial income and expenses in real terms and the
  erosion of balances of monetary items during the year.                                                                                              

10

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---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|           |                                             |                                                                                                                                                             |                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|---------- | ------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES(continued):
|           |                                             |                                                                                                                                                             |                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                             | 3)                                                                                                                                                          | The amounts
  of non-monetary assets do not necessarily represent realization value or
  current economic value, but only the reported amounts of such assets, as
  described in (1) above. In these financial statements, the term cost
  signifies cost in reported amounts.
|           |                                             |                                                                                                                                                             |                                                                                                                                                                                                                                                                                 
|           | c.                                          | Principles of consolidation:                                                                                                                               
|           |                                             |                                                                                                                                                            
|           |                                             | 1)                                                                                                                                                          | The
  consolidated financial statements include the accounts of the Company and its
  subsidiaries. The companies included in consolidation are listed in
  note 2.                                                                                                             
|           |                                             |                                                                                                                                                             |                                                                                                                                                                                                                                                                                 
|           |                                             | 2)                                                                                                                                                          | Intercompany
  balances and transactions have been eliminated.                                                                                                                                                                                                                  
|           |                                             |                                                                                                                                                             |                                                                                                                                                                                                                                                                                 
|           | d.                                          | Short term investments - marketable securities                                                                                                             
|           |                                             |                                                                                                                                                            
|           |                                             | These
  securities (except for investment in shares constituting permanent
  investment, see f(2) below), are stated at market value.                    
|           |                                             |                                                                                                                                                            
|           |                                             | The changes
  in value of the above securities are carried to income.                                                                                      
|           |                                             |                                                                                                                                                            
|           | e.                                          | Land - business inventory                                                                                                                                  
|           |                                             |                                                                                                                                                            
|           |                                             | The land is
  presented at cost, which - in managements estimation - is lower than market
  value.                                                        
|           |                                             |                                                                                                                                                            
|           |                                             | According to
  the agreements for the purchase of land, the Company might pay additional
  costs of up to 90% of the net sale proceeds, see also note 8(2).
|           |                                             |                                                                                                                                                            
|           | f.                                          | Investments:                                                                                                                                               
|           |                                             |                                                                                                                                                             |                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                             | 1)                                                                                                                                                          | Associated
  companies:                                                                                                                                                                                                                                                         
|           |                                             |                                                                                                                                                             |                                                                                                                                                                                                                                                                                 
|           |                                             |                                                                                                                                                             | (a)                                                                                                                                                                                                                                                                              | The
  investments in these companies are accounted for by the equity method. The
  company reviews  at each balance sheet date - whether any events have
  occurred or changes in circumstances have taken place, which might indicate
  that there has been an impairment of its investment in associated companies.
  The balance of the investment as of December 31, 2005 is presented net
  of a provision for the impairment in value of an associated company, see j. below
  and note 3.
|           |                                             |                                                                                                                                                             |                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                             |                                                                                                                                                             | (b)                                                                                                                                                                                                                                                                              | The excess
  of cost of the investment in associated companies over the Companys share in
  their equity in net assets at date of acquisition (excess of cost of
  investment) represents the amount attributed to land and buildings. The
  amount attributed to buildings is amortized in equal annual installments of
  4% per year.                                                                                                                                                       

11

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|           |                                             |                                                                                                                                       |                                                                                                                                                                                                                                                                                                                               
|---------- | ------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES(continued):
|           |                                             |                                                                                                                                       |                                                                                                                                                                                                                                                                                                                               
|           |                                             | 2)                                                                                                                                    | Other
  companies                                                                                                                                                                                                                                                                                                             
|           |                                             |                                                                                                                                       |                                                                                                                                                                                                                                                                                                                               
|           |                                             |                                                                                                                                       | The
  investments in the shares of these companies, including investments in quoted
  shares, which the Company intends to hold for a long period (permanent
  investment), are stated at cost, net of impairment for decrease in value,
  which is not of a temporary nature.                                              
|           |                                             |                                                                                                                                       |                                                                                                                                                                                                                                                                                                                               
|           | g.                                          | Fixed assets:                                                                                                                        
|           |                                             |                                                                                                                                      
|           |                                             | 1)                                                                                                                                    | These assets
  are stated at cost.                                                                                                                                                                                                                                                                                            
|           |                                             |                                                                                                                                       |                                                                                                                                                                                                                                                                                                                               
|           |                                             | 3)                                                                                                                                    | Cost of
  fixed assets includes the Companys share in a joint venture engaged solely
  in construction of a building and rental thereof.                                                                                                                                                                                     
|           |                                             |                                                                                                                                       |                                                                                                                                                                                                                                                                                                                               
|           |                                             |                                                                                                                                       | During the
  reported year the Company realized the building for rent - see also note 5.                                                                                                                                                                                                                                      
|           |                                             |                                                                                                                                       |                                                                                                                                                                                                                                                                                                                               
|           |                                             | 3)                                                                                                                                    | Financial
  expenses in respect of loans and credit applied to finance the construction
  or acquisition of buildings - incurred until construction was completed - were
  charged to cost of the buildings.                                                                                                                  
|           |                                             |                                                                                                                                       |                                                                                                                                                                                                                                                                                                                               
|           |                                             | 4)                                                                                                                                    | The assets
  are depreciated by the straight-line method, on basis of their estimated
  useful life. Annual rates of depreciation are 2% or 4%.                                                                                                                                                                               
|           |                                             |                                                                                                                                       |                                                                                                                                                                                                                                                                                                                               
|           | h.                                          | Deferred income taxes:                                                                                                               
|           |                                             |                                                                                                                                      
|           |                                             | 1)                                                                                                                                    | Deferred
  taxes are computed in respect of differences between the amounts presented in
  these statements and those taken into account for tax purposes. As to the
  factors in respect of which deferred taxes have been included - see
  note 10b.                                                                        
|           |                                             |                                                                                                                                       |                                                                                                                                                                                                                                                                                                                               
|           |                                             |                                                                                                                                       | Deferred tax
  balances are computed at the tax rate expected to be in effect at time of
  release to income from the deferred tax accounts. The amount of deferred
  taxes presented in the income statement reflects changes in the above
  balances during the year.                                                       
|           |                                             |                                                                                                                                       |                                                                                                                                                                                                                                                                                                                               
|           |                                             | 2)                                                                                                                                    | Taxes which
  would apply in the event of disposal of investments in subsidiaries and
  associated companies have not been taken into account in computing the
  deferred taxes, since as of the date of approval of these financial
  statements it is the Companys policy to hold these investments, not to
  realize them.
|           |                                             |                                                                                                                                       |                                                                                                                                                                                                                                                                                                                               
|           | i.                                          | Revenue recognition                                                                                                                  
|           |                                             |                                                                                                                                      
|           |                                             | Income from
  leasing of buildings is recognized on the accrual basis, in accordance with
  the terms of the agreements with tenants.

12

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------- | ------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES(continued):
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           | j.                                          | Impairment of assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                             | The company reviews - at each balance sheet date - whether any events
  have occurred or changes in circumstances have taken place, which might
  indicate that there has been an impairment of fixed assets and identifiable
  intangibles, including goodwill. When such indicators of impairment are
  present, the company evaluates whether the carrying value of the asset in the
  companys accounts can be recovered from the cash flows anticipated from that
  asset, and, if necessary, records an impairment provision up to the amount
  needed to adjust the carrying amount to the recoverable amount.
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                             | The recoverable value of an asset is determined according to the
  higher of the net selling price of the asset or its value in use to the
  company. The value in use is determined according to the present value of
  anticipated cash flows from the continued use of the asset, including those
  expected at the time of its future retirement and disposal.                                                                                                                                                                                                                                                    
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                             | During 2005
  the Company recorded an impairment charge on its investment in other company
  of NIS 4,571 thousand see also note 4b                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                             | In 2004 the
  Company recorded an impairment charge on its investment in Lysh of NIS 950
  thousand see also note 3c(3).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                             | The
  impairment loss is carried directly to income. Where indicators are present
  that beneficial events have occurred or beneficial changes in circumstances
  have taken place, the impairment provision in respect of the asset (other
  than goodwill) may be cancelled or reduced in the future, so long as the
  recoverable value of the asset has increased, as a result of changes in the
  estimates previously employed in determining such value.                                                                                                                                                       
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           | k.                                          | Cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                             | The Group
  considers all highly liquid investments, which include short-term bank
  deposits (up to three months from date of deposit) that are not
  restricted as to withdrawal or use, to be cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           | l.                                          | Loss per NIS 1 of par value of shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                             | The
  financial statements do not include data regarding loss per NIS 1 of par
  value of shares, since the data would not provide significant additional
  information to that otherwise provided by the financial statements.                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           | m.                                          | Format of income statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                             | In view of
  the nature of the Companys activities - holding of companies which operate
  in different fields - the Company is of the opinion that concentrated
  presentation of all revenue and gain items as a group, and of all expense and
  loss items in a separate group is more suitable to reflect its activities.                                                                                                                                                                                                                                                                                         

13

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---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|---------- | ------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES(continued):
|           |                                            
|           | n.                                          | Linkage basis                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                             | Balances the
  linkage arrangements in respect of which stipulate linkage to the last index
  published prior to date of payment are stated on the basis of the last index
  published prior to the latest balance sheet date (the index for November).                                                                                                                                                                                                      
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           | o.                                          | Use of estimates in the preparation of financial statements                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                             | The
  preparation of financial statements in conformity with generally accepted
  accounting principles requires management to make estimates and assumptions
  that affect the reported amounts of assets and liabilities and disclosure of
  contingent assets and liabilities at the dates of the financial statements
  and the reported amounts of revenues and expenses during the reporting years.
  Actual results could differ from those estimates.
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           | p.                                          | Dividend declared subsequent to balance sheet date                                                                                                                                                                                                                                                                                                                                                                                                           
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                             | Liabilities
  relating to dividends declared subsequent to balance sheet date are included
  in the accounts for the period in which the declaration was made. The amount
  declared is appropriated, however, from retained earnings, and reported as a
  separate item in the shareholders equity - Dividend declared subsequent to
  balance sheet date.                                                                                               
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           | q.                                          | Recently issued accounting pronouncements in Israel:                                                                                                                                                                                                                                                                                                                                                                                                         

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

14

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---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

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

15

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|           |                                                                                                                       |                                         
|---------- | --------------------------------------------------------------------------------------------------------------------- | ----------------------------------------
|NOTE 2    | INVESTMENTS IN SUBSIDIARIES                                                                                          
|           |                                                                                                                      
|           | Following is a list of the subsidiaries consolidated in Ophirs
  financial statements:                              
|           |                                                                                                                      
|           | Wholly-owned:                                                                                                        
|           | Ophir Financing Ltd. - inactive;                                                                                     
|           | Maoz Financial Investments Ltd. (Maoz) -
  inactive;                                                               
|           | Merkazim Investments Ltd. (Merkazim) a
  wholly-owned subsidiary of Maoz. During 2005 Merkazim ceased its activity.
|           | 80%-owned - New Horizons (1993) Ltd. (New
  Horizons).                                                             
|           |                                                                                                                      
|NOTE 3    | INVESTMENTS IN ASSOCIATED COMPANIES:                                                                                 
|           |                                                                                                                       |                                         
|           | a.                                                                                                                    | The investments are composed as follows:

| |                                                                                                                                                                         |  |                    |         |      |  |         |   | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ---- |  | ------- | - | 
| |                                                                                                                                                                         |  | consolidated       |        
| |                                                                                                                                                                         |  |                    |        
| |                                                                                                                                                                         |  | December
  31      |        
| |                                                                                                                                                                         |  |                    |        
| |                                                                                                                                                                         |  | 2005               |         | 2004 | 
| |                                                                                                                                                                         |  |                    |         |      | 
| |                                                                                                                                                                         |  | NIS in
  thousands |        
| |                                                                                                                                                                         |  |                    |        
|
| | Equity in net assets:                                                                                                                                                   |  |                    |         |      |  |         |  
| | Cost of shares                                                                                                                                                          |  |                    | 7,252   |      |  | 14,449  |  
| | Share in accumulated undistributed profit
  (1)                                                                                                                         |  |                    | 81,825  |      |  | 83,984  |  
| | Share in capital surplus derived by Mivnat
  Holdings Ltd. from sale of its investment in Industrial Buildings Ltd. to its
  Shareholders (see c(1) below and 4(a)) (1) |  |                    | 66,065  |      |  | 66,065  |  
| |                                                                                                                                                                         |  |                    |         |      |  |         |  
| |                                                                                                                                                                         |  |                    | 155,142 |      |  | 164,498 |  
| | Long-term loans (2)                                                                                                                                                     |  |                    | 3,056   |      |  | 28,731  |  
| | L e s s - provision for impairment of
  investment, see c(2), (3) below                                                                                                 |  |                    | (950    | )    |  | (5,954  | )
| |                                                                                                                                                                         |  |                    |         |      |  |         |  
| |                                                                                                                                                                         |  |                    | 157,248 |      |  | 187,275 |  
| |                                                                                                                                                                         |  |                    |         |      |  |         |  

| |    |                                                        |                                                                                                                                                                
| | -- | ------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | (1)                                                    | Including
  accumulated erosion of capital notes and gains on dilution of holding in
  associated companies resulting from issuance of shares to a third party.
| |    |                                                        |                                                                                                                                                                
| |    | (2)                                                    | As of
  December 2005 the loans are linked to the Israeli CPI, bear interest at
  annual rates of 1% and have no fixed maturity date.                          
| |    |                                                        |                                                                                                                                                                
| | b. | The changes in the investments in 2005 are as follows:

| |                                                                            |  |                    |         |   | 
| | -------------------------------------------------------------------------- |  | ------------------ | ------- | - | 
| |                                                                            |  | NIS in
  thousands |        
| |                                                                            |  |                    |        
|
| | Balance at beginning of year                                               |  |                    | 187,275 |  
| | Changes during the year:                                                   |  |                    |         |  
| | Share in profits of associated companies -
net                             |  |                    | 651     |  
| | Loans to an associated company                                             |  |                    | 746     |  
| | Accrued linkage differentials and interest in
respect of long-term
  loans |  |                    | 1,007   |  
| | Sale of investment                                                         |  |                    | (32,431 | )
| |                                                                            |  |                    |         |  
| | Balance at end of year                                                     |  |                    | 157,248 |  
| |                                                                            |  |                    |         |  

16

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|           |                                                  |                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|---------- | ------------------------------------------------ | ----------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 3    | INVESTMENTS IN ASSOCIATED COMPANIES (continued):
|           |                                                 
|           | c.                                               | Following are details relating to the associated companies:
|           |                                                  |                                                            
|           |                                                  | 1)                                                          | Mivnat
  Holdings Ltd. (Mivnat)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                                  |                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                  |                                                             | Mivnat was
  established in March 1993 by the Company, the subsidiary Merkazim and others,
  some of whom were interested parties, in order to acquire the Israeli
  Governments shares in Industrial Buildings Ltd. (Industrial Buildings).
  During March 1993, Mivnat acquired these shares in consideration of
  NIS 1,053 million. Ophir holds 18.75% interest in Mivnat directly, and
  25% interest jointly with Merkazim.                                                                                     
|           |                                                  |                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                  |                                                             | On
  December 31, 1998, Mivnat sold its holdings in Industrial Buildings to
  its shareholders (including the Company). Upon the consummation of the
  transaction, Mivnat ceased to have any rights in the shares of Industrial
  Buildings.                                                                                                                                                                                                                                                                            
|           |                                                  |                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                  |                                                             | During 2004,
  the Company realized all of its shares in Industrial Buildings see note 4a.                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                                  |                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                  | 2)                                                          | Shmey-Bar
  Real Estate 1993 Ltd., Shmey-Bar (T.H.) 1993 Ltd.and Shmey-Bar (I.A.) 1993 Ltd. (Shmey-Bar companies).                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                                  |                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                  |                                                             | The Company,
  along with a group of companies, established the Shmey-Bar companies in 1993.
  These companies were established for the purpose of dealing in development of
  fruit-bearing properties. They purchased rights to real estate and options to
  purchase real estate in Tel-Aviv, Haifa, Beer-Sheva, Kiryat Shemona, Eilat,
  Jerusalem, Holon, Tel-Hanan and Ramla, all from Hamashbir Hamerkazi Israel
  Cooperative Wholesale Society Ltd. The Companys holdings in Shmey-Bar
  companies total 22.2%.
|           |                                                  |                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                  |                                                             | On
  December 31, 2002, the Company wrote down its investment in the
  Shmey-Bar companies by NIS 5,004 thousands.                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                                  |                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                  |                                                             | On September
  20, 2005 the Company and Durban Investments Ltd. signed an agreement for the
  sale of all its shares and rights (including indemnification of the Company
  in connection with shareholders loan) in Smei Bar companies, the consideration
  for the sale amounted to NIS 32.6 million; as a result of the sale of the
  holdings as above, the Company recorded a loss in the amount of NIS 1,618
  thousands, which includes expenses of NIS 1.8 million attributed to the sale.                       

17

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|           |                                                
|---------- | -----------------------------------------------
|NOTE 3    | INVESTMENTSINASSOCIATEDCOMPANIES
  (continued):

| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 3) | Lysh The
  Coastal High-way Ltd. (L1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |    | In June
  1999, the Company entered into an investment agreement with Lysh Commercial
  and Road Services Ltd. (L2), a company controlled by Polar Investments Ltd.
  - an interested party in the Company, and with L1, a wholly-owned subsidiary
  of L2.                                                                                                                                                                                                                                                                                                                                                                 
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |    | L1 has a 50%
  holding in Beit Herut-Lysh Development Company Ltd. (BHL), which has
  invested in a project for the leasing of commercial premises near Moshav Beit
  Herut (the project).                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |    | BHL
  developed 16,850 square meters of land owned by the Israel Lands
  Administration (the Administration), in accordance with resolution 717 of
  the Administration. A commercial project occupying approximately 10,000
  square meters was constructed on that land initially, and there is an option
  to construct an additional 4,000 square meters at a later stage. The
  Companys share in L1 is approximately 25% (its share in the project being
  approximately 12.5%). The project commenced in March 2000. As of
  December 31, 2005 and 2004, the Company invested in L1 approximately
  NIS 5.5 million.
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |    | The Company
  has also undertaken to provide guarantees in an amount equivalent to 25% of
  the construction costs. As of December 31, 2005, the Companys share in
  the loans made to BHL amounts to approximately NIS 16.5 million.                                                                                                                                                                                                                                                                                                                                                                                        
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |    | The auditors
  of L1, while not qualifying their opinion on L1s financial statements for
  2005, drew attention to the financial position of BHL, whose financial
  statements presented a loss of approximately NIS 5.9 million (net of
  financial expenses in the amount of NIS 7.1 million) and negative
  working capital amounting to approximately NIS 3.8 million at
  December 31, 2005.                                                                                                                                                                                                                            
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |    | In 2005, BHL
  received shareholders loans in the amount of approximately NIS 2
  million from L1. In 2004, it was agreed that payments of principal of the
  loan for that year would be deferred.
  During the reported year, the Company and the bank agreed that the
  payments of principal of the loan for 2005 would be deferred and those
  payments would be made no later than March 31, 2006 and schedules the
  repayments of the balance of the loan over a period of 17 years.                                                                                                                                 
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |    | BHLs
  management believes that the execution of the aforementioned arrangements
  will guarantee the continuance of BHLs regular operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |    | In 2004, the
  Company wrote down its investment in BHL Company by NIS 950,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

18

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

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

| |                                                               |  |                  |       |      |  |        | 
| | ------------------------------------------------------------- |  | ---------------- | ----- | ---- |  | ------ | 
| |                                                               |  | Consolidated     |      
| |                                                               |  |                  |      
| |                                                               |  | December 31      |      
| |                                                               |  |                  |      
| |                                                               |  | 2005             |       | 2004 | 
| |                                                               |  |                  |       |      | 
| |                                                               |  | NIS in thousands |      
| |                                                               |  |                  |      
|
| | Industrial
  Buildings (a)                                    |  |                  |       |      |  | 67,402 | 
| | Memadim
  Investments Ltd. (Memadim) (b)                    |  |                  |       |      |  | 4,065  | 
| | Mahalachim
  Investment in Technology Ltd. (Mahalachim) (c) |  |                  | 1,351 |      |  | 1,351  | 
| | Others                                                        |  |                  | 36    |      |  | 36     | 
| |                                                               |  |                  |       |      |  |        | 
| |                                                               |  |                  | 1,387 |      |  | 72,854 | 
| |                                                               |  |                  |       |      |  |        | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Industrial
  Buildings is engaged in initiation and execution of construction projects -
  buildings for industry, designated for rental and sale - and in the
  management of land development and infrastructure preparation for residence
  and industry.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | As of January
  1, 2004, the Company held 36,281,616 ordinary shares of NIS 1 par value of
  Industrial Buildings that constitute 11.84% of the ordinary share capital of
  this company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | In 2004, the
  Company sold 4,400,036 shares of Industrial Buildings in consideration for
  approximately NIS 21.2 million, at a pre-tax gain of approximately
  NIS 0.3 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | In 2004, the
  Company received a dividend in the amount of NIS 10.3 from Industrial
  Buildings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | In
  January 2005, 15 million shares were sold in an off-the-floor
  transaction for NIS 75 million, at a pre-tax gain of NIS 1.7
  million. Consideration from sale of the said shares in the amount of NIS 68
  million was utilized in 2005 for repayment of part of the balance of bank
  loan in the amount of NIS 38.4 million, in favor of which the shares were
  pledged.  Part of the consideration
  from sale of the said shares in the amount of NIS 25 million is placed in a short-term deposit to secure
  the balance of the remaining loan (NIS 26.3 million) that was repaid in January
  and February 2006 (see note 6c). The
  short-term deposit, as stated above, is included under short-term investments
  at December 31, 2005.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | On February
  9, 2005, the Companys board of directors decided to distribute the remaining
  shares of Industrial Buildings, in the amount of NIS 80.9 million to
  shareholders, as a quasi-dividend. Additionally, the board decided to
  distribute the balance of cash, in the amount of NIS 9.9 million, to
  shareholders.                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | b. | Memadim was
  established in 1995 by the Company, along with a group of companies, one of
  which is Industrial Buildings, for the purpose of real estate development.
  The Company directly holds 10% of the ownership and control of Memadim. see
  also note 8(1).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The Company
  currently negotiates the sale of its holdings in Meimadim; therefore, in 2005
  the Company recorded in its accounts a provision of NIS 4,571 thousands for
  impairment of its investment in this Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | c. | Mahalachim
  is a venture capital fund; the Company holds approximately 3.5% of shares
  therein. In 2004, the Company received a dividend in the amount of
  NIS 3,255,000 from Mahalachim. The share of the dividend that was
  carried to income amounted to NIS 1,320,000. The balance of the amount
  was used to reduce the amount of the investment.                                                                                                                                                                                                                                                                                                                                                                                              

19

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|           |                                                                                                     
|---------- | ----------------------------------------------------------------------------------------------------
|NOTE 5    | FIXED ASSETS - BULDINGS FOR RENT:                                                                   
|           |                                                                                                     
|           | Composition of assets (buildings for rent - including land) as of
  December 31, 2004 are as follows

| |  |                               |  |                               |  |                        | 
| |  | ----------------------------- |  | ----------------------------- |  | ---------------------- | 
| |  | Cost                          |  | Accumulated
  
  depreciation |  | Depreciated 
  balance | 
| |  |                               |  |                               |  |                        | 
| |  | N I S  i n  t h o u s a n d s | 
| |  |                               |  |                               |  |                        | 
| |  |                               |  |                               |  |                        | 
| |  | 66,247                        |  | 8,822                         |  | 57,425                 | 
| |  |                               |  |                               |  |                        | 

|           |                       |                                                                                                                                                                                                                                                                       
|---------- | --------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           |                       | The Company
  had rights in an industrial commercial building on leased land for a period
  of 44 years, which will expire on October 31, 2037, jointly with other
  companies. The building is leased as part of a joint venture, the Copany
  share in which is 70%.
|           |                       |                                                                                                                                                                                                                                                                       
|           |                       | On July 11,
  2005, the Company sold its share in the rights in a commercial-industrial
  building in consideration for NIS 51 million.  The Company recorded a loss of NIS 7.5 million in respect of
  this transaction.                                             
|           |                      
|NOTE 6    | LONG-TERM BANK LOANS:
|           |                       |                                                                                                                                                                                                                                                                       
|           | a.                    | The loans
  are linked to the Israeli CPI and bear interest at the annual rate of 4%.                                                                                                                                                                                 
|           |                       |                                                                                                                                                                                                                                                                       
|           | b.                    | An early
  repayment of NIS 38.4 million was made in 2005.  The balance of the loan is to be repaid in accordance with an
  updated clearing schedule received from the bank.                                                                                         
|           |                       |                                                                                                                                                                                                                                                                       
|           | c.                    | The original
  clearing schedule of the loans for the years subsequent to balance sheet date
  is as follows:                                                                                                                                                         

| |                                            |  |                  |        |      |  |        | 
| | ------------------------------------------ |  | ---------------- | ------ | ---- |  | ------ | 
| |                                            |  | December 31      |       
| |                                            |  |                  |       
| |                                            |  | 2005             |        | 2004 | 
| |                                            |  |                  |        |      | 
| |                                            |  | NIS in thousands |       
| |                                            |  |                  |       
| |                                            |  |                  |       
| | First year -
  current maturities          |  |                  | 3,759  |      |  | 8,382  | 
| |                                            |  |                  |        |      |  |        | 
| | Second year                                |  |                  | 3,759  |      |  | 8,382  | 
| | Third year                                 |  |                  | 3,759  |      |  | 8,382  | 
| | Fourth year                                |  |                  | 3,759  |      |  | 8,382  | 
| | Fifth year                                 |  |                  | 3,759  |      |  | 8,382  | 
| | Sixth year
  and thereafter (through 2012) |  |                  | 7,516  |      |  | 25,147 | 
| |                                            |  |                  |        |      |  |        | 
| |                                            |  |                  | 22,552 |      |  | 58,675 | 
| |                                            |  |                  |        |      |  |        | 
| |                                            |  |                  | 26,311 |      |  | 67,057 | 
| |                                            |  |                  |        |      |  |        | 

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

20

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|           |                |                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---------- | -------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 7    | CAPITAL NOTES:
|           | a.             | On
  December 31, 1998, the Company and a subsidiary, Merkazim, issued
  capital notes to Mivnat with a par value of NIS 113,770,000 and
  NIS 37,831,000, respectively. The capital notes are unlinked and
  interest-free.                                                                                                                                                                                                        
|           |                | Capital
  notes with an aggregate par value of NIS 151,351,000 are repayable at
  par, upon demand of Mivnat, on January 1, 2005 and only on that date.
  After balance sheet date, the shareholders of Mivnat decided to extend the
  repayment date until January 1, 2007. The balance of the capital notes,
  NIS 250,000 par value, is repayable annually under the terms stipulated
  in the agreement.                        
|          
|           | b.             | On
  December 31, 1998 and on June 30, 2004, the Company issued capital
  notes to its subsidiary with a par value of NIS 37,769,000 and
  NIS 25,409,000, respectively. The capital notes are unlinked and interest-free,
  and are repayable at par, upon demand, on January 1, 2005 and only on
  that date. After balance sheet date, the shareholders of Merkazim decided to
  extend the repayment date until January 1, 2007.
|           | c.             | In 2002, the
  subsidiary New Horizons issued capital notes with a par value of
  NIS 119,000 and NIS 1,069,000 to the Company and the minority
  shareholder in the subsidiary, respectively. the Company and the minority
  shareholder in the subsidiary are entitled to receive from New Horizons the principal
  of the note, without interest or linkage, this after a period of not less
  than one year.                    

21

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|           |                                                                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------- | --------------------------------------------------------------- | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 8    | COMMITMENTS, PLEDGES AND LIMITATIONS IN RESPECT OF LIABILITIES:
|           |                                                                 | 1) | The Company
  has undertaken to invest in Memadim (see note 4b) approximately 10% of the
  cost of land and construction of a rental project which is constructed by
  Memadim on the Carmel shore. The investment was made partly through
  investment in Memadim (mainly shareholders loans), and partly by way of a
  guarantee provided. The Companys share in future construction costs is
  estimated at approximately U.S.$ 17 million. As of December 31, 2005, the
  balance of the loans to Memadim from banks amounts to approximately
  NIS 89 million, and the balance of the loans to Memadim from interested
  parties as of December 31, 2005 amounts to approximately NIS 45
  million see note 4b.
|           |                                                                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                                                 | 2) | In December
  1996, the subsidiary New Horizons acquired real estate (designated for sale)
  from a then interested party, which holds 20% of New Horizons shares. The
  selling company will be entitled to 90% of the profits from the subsequent
  sale of the real estate, with the balance accruing to New Horizons. The
  registration of the real estate in New Horizons name in the Land Registry
  has not yet been completed.                                                                                                                                                                                                                                                                             
|           |                                                                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                                                 |    | On December
  4, 2005, the subsidiary was granted an irrevocable option to sell all the
  rights in the real estate inventory that it owns for a consideration of 17,330 thousands dollar.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                                                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                                                 |    | The option period is limited to June 15,
  2006.  As of the date of approval of
  these financial statements, the subsidiary had not exercised the option
  granted to it.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                                                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                                                 | 3) | As to the
  Companys commitment to grant guarantees to BHL, see note 3c(3).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                 |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                                                 | 4) | The Company
  and a subsidiary receive various services from the shareholders in Ophir,
  including management services, head office services, bookkeeping and legal
  services. As to the expenses recorded in respect of such services, see
  note 11.                                                                                                                                                                                                                                                                                                                                                                                                                                                              

22

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|           |                |                                                     
|---------- | -------------- | ----------------------------------------------------
|NOTE 9    | SHARE CAPITAL:
|           |               
|           | a.             | Composed at
  December 31, 2005 and 2004 as follows:

| |                                 |  |                  |         |                    |  |            |  |                    |        |  |  |        | 
| | ------------------------------- |  | ---------------- | ------- | ------------------ |  | ---------- |  | ------------------ | ------ |  |  | ------ | 
| |                                 |  | Number of shares |         | Amount in NIS      | 
| |                                 |  |                  |         |                    | 
| |                                 |  | Authorized       |         | Issued 
  and paid |  | Authorized |  | Issued 
  and paid |       
| |                                 |  |                  |         |                    |  |            |  |                    |       
| | Ordinary
  shares of NIS 0.001  |  |                  |         |                    |  |            |  |                    |        |  |  |        | 
| | par value                       |  |                  | 160,000 |                    |  | 100,000    |  |                    | 162    |  |  | 101    | 
| |                                 |  |                  |         |                    |  |            |  |                    |        |  |  |        | 
| | Deferred
  shares of NIS 0.0001 |  |                  |         |                    |  |            |  |                    |        |  |  |        | 
| | par value*                      |  |                  | 3       |                    |  | 3          |  |                    | 0.0003 |  |  | 0.0003 | 
| |                                 |  |                  |         |                    |  |            |  |                    |        |  |  |        | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                        
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------
| |    | *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | The deferred
  shares confer upon their holders the right to receive their par value upon
  liquidation of the Company.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | b. | In February
  2005 the Companys board of directors resolved to distribute its shareholders
  the balance of the shares of Industrial Buildings (amounting to NIS 80,930
  thousands) as a dividend in kind.
  Also, the Company distributed its shareholders a cash dividend of NIS
  9,990 thousands.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Also, on
  October 16, 2005, the Companys board of directors resolved to distribute the
  shareholders a dividend in the total amount of NIS 82 million.  For the purpose of distributing this
  dividend, the Company requested the Court to approve a deduction of capital
  for the Company in an amount of up to NIS 64 million.  On November 29, 2005, the Court approved
  the said request.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | At a later
  date, in order to clarify the board of directors resolution dated October
  16, 2005 and the Companys shareholders resolution dated November 6, 2005 to
  approve a certain amount out of which the Company would distribute its
  shareholders a dividend in the total amount of up to NIS 82 million for the
  years 2005 and 2006 and in light of the Tel-Aviv District Courts resolution
  to approve a distribution of dividend that does not meet the criteria of the
  profit test as required under Section 303 of the Companies Law, 1999 and
  also since in December 2005 the owners of the Company resolved that the
  declaration and distribution of the dividend will take place in 2005 and
  2006, the board approved in February 2006 the declaration and distribution of
  dividend to the shareholders, as follows: a total of NIS 20 million paid in
  cash on December 28, 2005 and a total of NIS 55 million on January 8, 2006.

23

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|            |                  |                                                                                                                                                                                                                                               
|----------- | ---------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10    | TAXES ON INCOME:
|            |                  |                                                                                                                                                                                                                                               
|            | a.               | MeasurementofresultsfortaxpurposesundertheIncomeTax
  (InflationaryAdjustments)Law, 1985(hereafter - the inflationary
adjustments
  law)                                                                                                      
|            |                  |                                                                                                                                                                                                                                               
|            |                  | Under the
  inflationary adjustments law, results for tax purposes are measured in real
  terms, having regard to the changes in the Israeli CPI. The Company and its
  Israeli subsidiaries are taxed under the inflationary adjustments law.
|            |                  |                                                                                                                                                                                                                                               
|            | b.               | Deferredincometaxes:                                                                                                                                                                                                                          
|            |                  |                                                                                                                                                                                                                                               
|            |                  | The
  composition of the deferred taxes, and the changes therein during the
  reported years, are as follows:                                                                                                                                 

| |                                                                                |  |                         |        |  
| | ------------------------------------------------------------------------------ |  | ----------------------- | ------ | -
| |                                                                                |  | Depreciablefixed assets |       
| |                                                                                |  |                         |       
| |                                                                                |  | NIS in thousands        |       
| |                                                                                |  |                         |       
|
| | Balance at
  January 1, 2004                                                   |  |                         | (2,676 | )
|
| | Changes in
  2004- amounts carried to income                                   |  |                         | (126   | )
|
| |                                                                                |  |                         |        |  
| | Balance at
  December 31, 2004                                                 |  |                         | (2,550 | )
|
| | Changes in
  2005- amounts carried to income                                   |  |                         | 2,550  |  
| |                                                                                |  |                         |        |  
| | Balance at
  December 31, 2005                                                 |  |                         | -,-    |  
| |                                                                                |  |                         |        |  
| |                                                                               
| | Deferred
  taxes are presented in the balance sheets as long-term liabilities.

| |    |                                             |            
| | -- | ------------------------------------------- | -----------
| | c. | Taxesonincomeincludedintheincomestatements:
| |    |                                             |            
| |    | 1)                                          | As follows:

| |                               |  |                  |        |      |  |       |   |  |       | 
| | ----------------------------- |  | ---------------- | ------ | ---- |  | ----- | - |  | ----- | 
| |                               |  | 2005             |        | 2004 |  | 2003  |  
| |                               |  |                  |        |      |  |       |  
| |                               |  | NIS in thousands |       
| |                               |  |                  |       
|
| | For the
  reported year:      |  |                  |        |      |  |       |   |  |       | 
| | Current                       |  |                  |        |      |  |       |   |  | 1,760 | 
| | Deferred, see also b. above   |  |                  | (2,550 | )    |  | (126  | ) |  | 2,971 | 
| |                               |  |                  |        |      |  |       |   |  |       | 
| |                               |  |                  | (2,550 | )    |  | (126  | ) |  | 4,731 | 
| |                               |  |                  |        |      |  |       |   |  |       | 
| | For previous
  years- current |  |                  | (2,705 | )    |  | 2,500 |   |  |       | 
| |                               |  |                  |        |      |  |       |   |  |       | 
| |                               |  |                  | (5,255 | )    |  | 2,374 |   |  | 4,731 | 
| |                               |  |                  |        |      |  |       |   |  |       | 

| |  |                                                                                             
| |  | --------------------------------------------------------------------------------------------
| |  | Current
  taxes are computed at the tax rate of 34%. For tax  rates amendment see (e) below.

24

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|            |                             |    |                                                                                                                                                                                                         
|----------- | --------------------------- | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10    | TAXES ON INCOME(continued):
|           
|            |                             | 2) | Following is
  a reconciliation of the theoretical tax expense, assuming all income is taxed
  at the regular tax rates applicable to companies in Israel (see (1) above),
  and the actual tax expense:

| |                                                                                                                                                                   |  |                  |         |      |  |        |   |  |        |  
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | ---- |  | ------ | - |  | ------ | -
| |                                                                                                                                                                   |  | 2005             |         | 2004 |  | 2003   |  
| |                                                                                                                                                                   |  |                  |         |      |  |        |  
| |                                                                                                                                                                   |  | NIS in thousands |        
| |                                                                                                                                                                   |  |                  |        
|
| | Income (loss) before taxes on income as
  reported in the income statements                                                                                       |  |                  | (11,420 | )    |  | 16,669 |   |  | 7,027  |  
| | Add (less) -
  share in profits of associated companies - net                                                                                                     |  |                  | 651     |      |  | 1,150  |   |  | 2,071  |  
| |                                                                                                                                                                   |  |                  |         |      |  |        |   |  |        |  
| | B a l a n c
  e - income (loss)                                                                                                                                   |  |                  | (12,071 | )    |  | 17,819 |   |  | 9,098  |  
| |                                                                                                                                                                   |  |                  |         |      |  |        |   |  |        |  
| | Theoretical
  tax expense (tax saving)                                                                                                                            |  |                  | (4,104  | )    |  | 6,237  |   |  | 3,275  |  
| | Increase (decrease) in taxes resulting from
  permanent differences - the tax effect:                                                                             |  |                  |         |      |  |        |   |  |        |  
| | Disallowable deductions (exempt income)                                                                                                                           |  |                  | (626    | )    |  | 337    |   |  | (156   | )
| | Differences for which deferred taxes were
  not created, net                                                                                                      |  |                  | 2,224   |      |  | (870   | ) |  | 4,101  |  
| | Taxes on income subject to different rates
  - dividends received from other companies                                                                            |  |                  |         |      |  | (4,418 | ) |  | (2,843 | )
| | Taxes in respect of previous years                                                                                                                                |  |                  | (2,705  | )    |  | 2,500  |   |  |        |  
| | Difference between the basis of measurement
  of income reported for tax purposes and the basis of measurement of income
  for financial reporting purposes - net |  |                  | (309    | )    |  |        |   |  |        |  
| | Sundry  net                                                                                                                                                      |  |                  | 265     |      |  | (1,412 | ) |  | 354    |  
| |                                                                                                                                                                   |  |                  |         |      |  |        |   |  |        |  
| | Taxes on
  income for the reported year                                                                                                                           |  |                  | (5,255  | )    |  | 2,374  |   |  | 4,731  |  
| |                                                                                                                                                                   |  |                  |         |      |  |        |   |  |        |  

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | d. | Taxassessments                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | The Company
  has received final assessments through tax year 2001.                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | Subsidiaries:                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | Merkazim -
  final assessments has been received through tax year 2004.                                                                                                                                                                                                                                                                                                                                                                                         
| |    | New Horizons
  - assessments that are considered as final through tax year 2001.                                                                                                                                                                                                                                                                                                                                                                                
| |    | Ophir
  Financing Ltd. -  assessments that are
  considered as final through tax year 2001.                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | e. | Tax rates                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | The
  Companys income in Israel is subject to the regular corporate tax rate;
  until December 31, 2003, a corporate tax rate of 36% was applied. In
  July 2004, an Amendment to the Income Tax Ordinance was published, which
  determined, inter alia, that the rate of corporate tax will be gradually
  reduced from 36% to 30%, in the following manner: the rate for 2004 will be
  35%, in 2005 - 34%, in 2006 - 32%, and in 2007 and thereafter - 30%.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | In August
  2005, a further amendment (No. 147) was published, which makes a further
  revision to the corporate tax rates prescribed by Amendment
  No. 140.  As a result of the
  aforementioned amendments, the corporate tax rates for 2004 and thereafter
  are as follows: 2004 - 35%,  2005 -
  34%, 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 - 26% and for 2010 and
  thereafter - 25%.                                                                 

25

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|            |                            
|----------- | ---------------------------
|NOTE 10    | TAXES ON INCOME(continued):

|            |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                  
|----------- | ----------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            | f.                                              | Real losses on realization of marketable securities for tax
  purposes, carried forward to future years                                                                                                                                                                                                                                                                                                        
|            |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                 | Carryforward
  real losses on realization of marketable securities at December 31,
  2005 aggregate NIS 36 million; December 31, 2004 - NIS 11
  million.  The real losses are
  deductible from future real income from marketable securities, if any.  No deferred tax assets have been included
  in respect of such losses, as it is not probable that they will be utilized
  in the foreseeable future.
|           
|NOTE 11    | TRANSACTIONS AND BALANCES WITH RELATED PARTIES:
|            |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | a.                                              | Transactionswith related parties:                                                                                                                                                                                                                                                                                                                                                                                

| |                                                                                      |  |                  |       |      |  |       |  |  |        |  
| | ------------------------------------------------------------------------------------ |  | ---------------- | ----- | ---- |  | ----- |  |  | ------ | -
| |                                                                                      |  | 2005             |       | 2004 |  | 2003  | 
| |                                                                                      |  |                  |       |      |  |       | 
| |                                                                                      |  | NIS in thousands |      
| |                                                                                      |  |                  |      
| | Income
  (expenses):                                                                 |  |                  |       |      |  |       |  |  |        |  
| |                                                                                      |  |                  |       |      |  |       |  |  |        |  
| | Linkage differences on short- term loans to
  related party company                  |  |                  | 194   |      |  |       |  |  | 165    |  
| |                                                                                      |  |                  |       |      |  |       |  |  |        |  
| | Financial income on loan to shareholders
  and associated companies                  |  |                  | 1,607 |      |  | 1,371 |  |  | 637    |  
| |                                                                                      |  |                  |       |      |  |       |  |  |        |  
| | Management fees from other company                                                   |  |                  |       |      |  | 433   |  |  | 438    |  
| |                                                                                      |  |                  |       |      |  |       |  |  |        |  
| | Included in general and administrative
  expenses                                    |  |                  |       |      |  |       |  |  | (3,507 | )
| |                                                                                      |  |                  |       |      |  |       |  |  |        |  
| | Participation in expenses of shareholders
  and a corporate interested party         |  |                  |       |      |  |       |  |  | (250   | )
| |                                                                                      |  |                  |       |      |  |       |  |  |        |  
| | Management fees to shareholder                                                       |  |                  | 1,000 |      |  |       |  |  |        |  
| |                                                                                      |  |                  |       |      |  |       |  |  |        |  
| |                                                                                      |  |                  |       |      |  |       |  |  |        |  
| | As to other
  transactions with, and commitments to, interested parties, see note 8.
| |                                                                                      |  |                  |       |      |  |       |  |  |        |  

| |    |                                |             
| | -- | ------------------------------ | ------------
| | b. | Balances with related parties:
| |    |                                |             
| |    | 1)                             | Receivables:

| |                                                                |  |                  |        |      |  |        | 
| | -------------------------------------------------------------- |  | ---------------- | ------ | ---- |  | ------ | 
| |                                                                |  | December 31      |       
| |                                                                |  |                  |       
| |                                                                |  | 2005             |        | 2004 | 
| |                                                                |  |                  |        |      | 
| |                                                                |  | NIS in thousands |       
| |                                                                |  |                  |       
|
| | a) Loan to a
  corporate interested party (1)                  |  |                  | 8,306  |      |  | 8,114  | 
| |                                                                |  |                  |        |      |  |        | 
| | b) Long-term
  receivables - loans to associated companies (2) |  |                  | 3,056  |      |  | 28,731 | 
| |                                                                |  |                  |        |      |  |        | 
| | c) A
  corporate related party  current
  account              |  |                  |        |      |  |        | 
| | d)
  Shareholders - current accounts                           |  |                  | 54,952 |      |  | 151    | 
| |                                                                |  |                  |        |      |  |        | 

| |  |    |                                                                                                                                      |                                                                                             
| |  | -- | ------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------
| |  |    | (1)                                                                                                                                  | The
  loan is linked to the Israeli CPI and bears no interest.                              
| |  |    |                                                                                                                                      |                                                                                             
| |  |    |                                                                                                                                      | The
  corporate related party is to repay this debt out of its future positive
  cash  flow.
| |  |    |                                                                                                                                      |                                                                                             
| |  |    | (2)                                                                                                                                  | The loans are linked to the Israeli CPI and bear annual interest at
  the rate of 1%.       
| |  |    |                                                                                                                                      |                                                                                             
| |  |    |                                                                                                                                      | As
  to current balances with associated and other companies, see note 13a.                 
| |  |    |                                                                                                                                     
| |  | 2) | Long-term liability in
  respect of acquisition of land - business inventory - is linked to the
  Israeli CPI and bears no interest.

26

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|            |                               |            
|----------- | ----------------------------- | -----------
|NOTE 12    | LINKAGE OF MONETARY BALANCES:
|            |                              
|            | a.                            | As follows:

| |                                           |  |                               |        |          |  |         |  |  |         | 
| | ----------------------------------------- |  | ----------------------------- | ------ | -------- |  | ------- |  |  | ------- | 
| |                                           |  | December 31, 2005             |       
| |                                           |  |                               |       
| |                                           |  | Linked
  to the
  Israeli CPI |        | Unlinked |  | Total   | 
| |                                           |  |                               |        |          |  |         | 
| |                                           |  | NIS in thousands              |       
| |                                           |  |                               |       
|
| | Assets:                                   |  |                               |        |          |  |         |  |  |         | 
| | Current assets:                           |  |                               |        |          |  |         |  |  |         | 
| | Cash and cash equivalents                 |  |                               |        |          |  | 2,396   |  |  | 2,396   | 
| | Short-term investments                    |  |                               | 24,549 |          |  | 469     |  |  | 25,018  | 
| | Accounts receivable                       |  |                               | 55,419 |          |  | 10,595  |  |  | 66,014  | 
| | Loan to a related party                   |  |                               | 8,306  |          |  |         |  |  | 8,306   | 
| | Long-term loans to associated companies   |  |                               | 3,056  |          |  |         |  |  | 3,056   | 
| |                                           |  |                               |        |          |  |         |  |  |         | 
| |                                           |  |                               | 91,330 |          |  | 13,460  |  |  | 104,790 | 
| |                                           |  |                               |        |          |  |         |  |  |         | 
| | Liabilities:                              |  |                               |        |          |  |         |  |  |         | 
| | Current liabilities:                      |  |                               |        |          |  |         |  |  |         | 
| | Short-term credit from bank               |  |                               |        |          |  | 75      |  |  | 75      | 
| | Accounts payable and accruals             |  |                               |        |          |  | 4,245   |  |  | 4,245   | 
| | Long-term liabilities:                    |  |                               |        |          |  |         |  |  |         | 
| | Bank loans (including current maturities) |  |                               | 26,311 |          |  |         |  |  | 26,311  | 
| | Capital notes to associated company       |  |                               |        |          |  | 151,601 |  |  | 151,601 | 
| | Capital note to an interested party       |  |                               |        |          |  | 1,069   |  |  | 1,069   | 
| | Acquisition of land - business inventory  |  |                               | 11,894 |          |  |         |  |  | 11,894  | 
| |                                           |  |                               |        |          |  |         |  |  |         | 
| |                                           |  |                               | 38,205 |          |  | 156,990 |  |  | 195,195 | 
| |                                           |  |                               |        |          |  |         |  |  |         | 

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

| |                                        |  |                            |     |              |      |     | 
| | -------------------------------------- |  | -------------------------- | --- | ------------ | ---- | --- | 
| |                                        |  | Exchange rateof one dollar |     | IsraeliCPI*  |     
| |                                        |  |                            |     |              |     
| | At end of
  year:                      |  |                            |     |              |      |     | 
| | 2005                                   |  | NIS 4.603                  |     | 185.1 points |     
| | 2004                                   |  | NIS 4.308                  |     | 180.7 points |     
| | 2003                                   |  | NIS 4.379                  |     | 178.6 points |     
| | 2002                                   |  | NIS 4.737                  |     | 182.0 points |     
| |                                        |  |                            |     |              |      |     | 
| | Increase
  (decrease) during the year: |  |                            |     |              |      |     | 
| | 2005                                   |  | 6.8                        | %   |              | 2.4  | %   | 
| | 2004                                   |  | (1.6                       | ) % |              | 1.2  | %   | 
| | 2003                                   |  | (7.5                       | ) % |              | (1.9 | ) % | 

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

27

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|            |                                               
|----------- | ----------------------------------------------
|NOTE 13    | SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:
|            |                                               
|            | Balancesheets:                                

| |    |                                                                                                                                                                                                                                   |  |                  |        |      |  |       | 
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------ | ---- |  | ----- | 
| |    |                                                                                                                                                                                                                                   |  | December 31      |       
| |    |                                                                                                                                                                                                                                   |  |                  |       
| |    |                                                                                                                                                                                                                                   |  | 2005             |        | 2004 | 
| |    |                                                                                                                                                                                                                                   |  |                  |        |      | 
| |    |                                                                                                                                                                                                                                   |  | NIS in thousands |       
| |    |                                                                                                                                                                                                                                   |  |                  |       
| | a. | Accounts receivable - other:                                                                                                                                                                                                      |  |                  |        |      |  |       | 
|
| |    | Deposits in respect of sale of fixed
assets                                                                                                                                                                                       |  |                  | 10,280 |      |  | 3,500 | 
| |    | Associated and others companies                                                                                                                                                                                                   |  |                  | 467    |      |  | 626   | 
| |    | Other                                                                                                                                                                                                                             |  |                  | 315    |      |  | 727   | 
| |    |                                                                                                                                                                                                                                   |  |                  |        |      |  |       | 
| |    |                                                                                                                                                                                                                                   |  |                  | 11,062 |      |  | 4,853 | 
| |    |                                                                                                                                                                                                                                   |  |                  |        |      |  |       | 
| | b. | Bank credit:                                                                                                                                                                                                                      |  |                  |        |      |  |       | 
| |    | Short-term credit and loans                                                                                                                                                                                                       |  |                  | 75     |      |  | 1     | 
| |    | Current maturities of long- term loans, see
  note 6                                                                                                                                                                              |  |                  | 3,759  |      |  | 8,382 | 
| |    |                                                                                                                                                                                                                                   |  |                  |        |      |  |       | 
| |    |                                                                                                                                                                                                                                   |  |                  | 3,834  |      |  | 8,383 | 
| |    |                                                                                                                                                                                                                                   |  |                  |        |      |  |       | 
| | c. | Accounts payable and accruals:                                                                                                                                                                                                    |  |                  |        |      |  |       | 
| |    | Trade                                                                                                                                                                                                                             |  |                  | 21     |      |  | 370   | 
| |    | Institutions                                                                                                                                                                                                                      |  |                  | 2,516  |      |  | 2,545 | 
| |    | Accrued expenses                                                                                                                                                                                                                  |  |                  | 404    |      |  | 202   | 
| |    | Other                                                                                                                                                                                                                             |  |                  | 1,304  |      |  | 1,004 | 
| |    |                                                                                                                                                                                                                                   |  |                  |        |      |  |       | 
| |    |                                                                                                                                                                                                                                   |  |                  | 4,245  |      |  | 4,121 | 
| |    |                                                                                                                                                                                                                                   |  |                  |        |      |  |       | 
| | d. | Concentrations of credit risks                                                                                                                                                                                                    |  |                  |        |      |  |       | 
| |    |                                                                                                                                                                                                                                   |  |                  |        |      |  |       | 
| |    | The Groups
  cash and cash equivalents and short-term investments at December 31,
  2005 and 2004 are deposited with Israeli banks. The Company is of the opinion
  that the credit risk in respect of these balances is remote.

28

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|            |                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----------- | ------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 13    | SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
  (continued):
|            |                                                             
|            | e.                                                           | Fair value of financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                              | The fair
  value of financial instruments included in the working capital of the Group
  is usually identical or close to their carrying value. The fair value of
  long-term loans to associated and other companies and long-term bank loans
  also approximates their carrying value, since they bear interest at rates
  close to prevailing market rates. The determination of the fair value of the
  capital notes to an associated company and a subsidiary and long-term
  liabilities in respect of acquisition of land - business inventory is not
  practical.

| |    |                                                          |  |                  |       |      |  |       |  |  |       | 
| | -- | -------------------------------------------------------- |  | ---------------- | ----- | ---- |  | ----- |  |  | ----- | 
| |    |                                                          |  | 2005             |       | 2004 |  | 2003  | 
| |    |                                                          |  |                  |       |      |  |       | 
| |    |                                                          |  | NIS in thousands |      
| |    |                                                          |  |                  |      
| |    |                                                          |  |                  |       |      |  |       |  |  |       | 
| | f. | Financial expenses (income) - net:                       |  |                  |       |      |  |      
| |    |                                                          |  |                  |       |      |  |       |  |  |       | 
| |    | Financial expenses:                                      |  |                  |       |      |  |       |  |  |       | 
| |    | In respect of long-term loans                            |  |                  | 3,593 |      |  | 3,692 |  |  | 3,324 | 
| |    | In respect of short-term bank credit                     |  |                  | 11    |      |  |       |  |  | 232   | 
| |    | Other                                                    |  |                  | 250   |      |  | 84    |  |  | 138   | 
| |    |                                                          |  |                  |       |      |  |       |  |  |       | 
| |    |                                                          |  |                  | 3,854 |      |  | 3,776 |  |  | 3,694 | 
| |    |                                                          |  |                  |       |      |  |       |  |  |       | 
| |    | Financial income:                                        |  |                  |       |      |  |       |  |  |       | 
| |    | In respect of bank deposits                              |  |                  | 1,777 |      |  | 1,354 |  |  | 411   | 
| |    | Financial income on loan to shareholders                 |  |                  | 600   |      |  |       |  |  |       | 
| |    | In respect of loans to a related party                   |  |                  | 194   |      |  |       |  |  |       | 
| |    | In respect of short-term loans to
  associated companies |  |                  | 1,007 |      |  | 1,371 |  |  | 637   | 
| |    | Assigned interest and linkage differences
  and other    |  |                  | 459   |      |  | 351   |  |  | 1,114 | 
| |    |                                                          |  |                  |       |      |  |       |  |  |       | 
| |    |                                                          |  |                  | 4,037 |      |  | 3,076 |  |  | 2,162 | 
| |    |                                                          |  |                  |       |      |  |       |  |  |       | 
| |    |                                                          |  |                  | (183  | )    |  | 700   |  |  | 1,532 | 
| |    |                                                          |  |                  |       |      |  |       |  |  |       | 

29

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

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

| |    |          |                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | -------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | General:
| |    |         
| |    | 1)       | The Company
  prepares its financial statements in accordance with Israeli GAAP. As
  applicable to these financial statements, Israeli GAAP and U.S. of America
  GAAP vary in certain significant respects, as described below:                                                                                                                                                              
| |    |          |                                                                                                                                                                                                                                                                                                                                                                                                
| |    | 2)       | Effect of
  inflation                                                                                                                                                                                                                                                                                                                                                                          
| |    |          |                                                                                                                                                                                                                                                                                                                                                                                                
| |    |          | In accordance
  with Israeli GAAP, through December 31, 2003, the Company comprehensively
  included the effect of the changes in the general purchasing power of Israeli
  currency in these financial statements, as described in note 1b. In view
  of the past inflation in Israel, this was considered a more meaningful
  presentation than financial reporting based on historical cost.
| |    |          |                                                                                                                                                                                                                                                                                                                                                                                                
| |    |          | Under US
  GAAP Israel is not considered to be a highly inflationary country, thus the
  measurement currency should be in nominal NIS.                                                                                                                                                                                                                                                        
| |    |          |                                                                                                                                                                                                                                                                                                                                                                                                
| |    |          | The
  adjustments to reflect the changes in the general purchasing power of Israeli
  currency have been reversed in the reconciliation of Israeli GAAP to U.S.
  GAAP.                                                                                                                                                                                                                        
| |    |          |                                                                                                                                                                                                                                                                                                                                                                                                
| |    | 3)       | Investment
  in marketable securities                                                                                                                                                                                                                                                                                                                                                          
| |    |          |                                                                                                                                                                                                                                                                                                                                                                                                
| |    |          | In
  accordance with Israeli GAAP, since the Companys intent was to hold some of
  the investment as an investment for a long period, it was partly stated at
  cost, net of impairment for decrease in value, which was other than temporary
  decline in their value. During 2005 the company sold its investment (see also
  note 4).                                                      
| |    |          |                                                                                                                                                                                                                                                                                                                                                                                                
| |    |          | Under U.S.
  GAAP, this investment was classified as an investment in available for sale
  and was reported at fair value with unrealized gains and losses, recorded as
  a separate component of other comprehensive income (loss) in shareholders
  equity until realized in 2005.                                                                                                          

30

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|            |                                                                                                                           |                                                                                                                                    |                     
|----------- | ------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | --------------------
|NOTE 14    | EFFECT OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
  PRINCIPLES IN ISRAEL AND IN THE U.S.A.(continued):
|            |                                                                                                                          
|            | b.                                                                                                                        | The effect
  of the material GAAP differences, as described in a. above, on the
  consolidated financial statements is as follows:
|            |                                                                                                                           |                                                                                                                                   
|            |                                                                                                                           | 1)                                                                                                                                 | Operating
  results:

| |                                                                                            |  |                  |        |      |  |        |   |  |        |  
| | ------------------------------------------------------------------------------------------ |  | ---------------- | ------ | ---- |  | ------ | - |  | ------ | -
| |                                                                                            |  | 2005             |        | 2004 |  | 2003   |  
| |                                                                                            |  |                  |        |      |  |        |  
| |                                                                                            |  | NIS in thousands |       
| |                                                                                            |  |                  |       
| |                                                                                            |  |                  |       
| | Net income (losses) as reported in these
  financial statements according to Israeli GAAP) |  |                  | (6,165 | )    |  | 14,296 |   |  | 2,311  |  
| | Effect of the treatment of the following
  items under U.S. GAAP:                          |  |                  |        |      |  |        |   |  |        |  
| | Reversal of the adjustment due to effect of
  inflation                                    |  |                  | 76,050 |      |  | 7,631  |   |  | 39,051 |  
| | Reversal of the adjustment due to
  Marketable securities- available for sale              |  |                  | 1,985  |      |  | (2,256 | ) |  |        |  
| | Other                                                                                      |  |                  | 478    |      |  | 107    |   |  | (405   | )
| |                                                                                            |  |                  |        |      |  |        |   |  |        |  
| | Net income under U.S. GAAP                                                                 |  |                  | 72,348 |      |  | 19,778 |   |  | 40,957 |  
| |                                                                                            |  |                  |        |      |  |        |   |  |        |  

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

| |                                                                                              |  |                  |        |      |  |         |  
| | -------------------------------------------------------------------------------------------- |  | ---------------- | ------ | ---- |  | ------- | -
| |                                                                                              |  | December 31,     |       
| |                                                                                              |  |                  |       
| |                                                                                              |  | 2005             |        | 2004 | 
| |                                                                                              |  |                  |        |      | 
| |                                                                                              |  | NIS in thousands |       
| |                                                                                              |  |                  |       
| |                                                                                              |  |                  |       
| | Shareholders equity, as reported in these
  financial statements, according to Israeli GAAP |  |                  | 78,197 |      |  | 195,282 |  
| | Effect of the treatment of the above
  differences under U.S. GAAP:                          |  |                  |        |      |  |         |  
| | Reversal of the adjustment due effect of
  inflation, net                                    |  |                  | (1,697 | )    |  | (77,747 | )
| | Reversal of the adjustment due marketable
  securities-available for sale                    |  |                  |        |      |  | (3,061  | )
| | Other comprehensive income-marketable
  securities                                           |  |                  |        |      |  | 61,182  |  
| | Other                                                                                        |  |                  | 218    |      |  | (545    | )
| |                                                                                              |  |                  |        |      |  |         |  
| | Shareholders equity under U.S. GAAP                                                         |  |                  | 76,718 |      |  | 175,111 |  
| |                                                                                              |  |                  |        |      |  |         |  

31

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (continued)

|            |                                                                                                                           |    |                                                                                                  
|----------- | ------------------------------------------------------------------------------------------------------------------------- | -- | -------------------------------------------------------------------------------------------------
|NOTE 14    | EFFECT OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
  PRINCIPLES IN ISRAEL AND IN THE U.S.A.(continued):
|            |                                                                                                                           |    |                                                                                                  
|            |                                                                                                                           | 3) | The effect
  of the foregoing GAAP difference on reporting comprehensive income, is as
  follows:

| |                                                                                                 |  |                  |         |      |  |        |  |  |         | 
| | ----------------------------------------------------------------------------------------------- |  | ---------------- | ------- | ---- |  | ------ |  |  | ------- | 
| |                                                                                                 |  | 2005             |         | 2004 |  | 2003   | 
| |                                                                                                 |  |                  |         |      |  |        | 
| |                                                                                                 |  | NIS in thousands |        
| |                                                                                                 |  |                  |        
|
| | Net income as reconciled to U.S. GAAP, see
  above                                              |  |                  | 72,348  |      |  | 19,778 |  |  | 40,957  | 
| | Other comprehensive income - gains not reported (previously reported) in the income statements- |  |                  |         |      |  |        |  |  |         | 
| | Unrealized (realized) gains on marketable
  securities                                          |  |                  | (61,182 | )    |  | 20,659 |  |  | 78,278  | 
| |                                                                                                 |  |                  |         |      |  |        |  |  |         | 
| |                                                                                                 |  |                  |         |      |  |        |  |  |         | 
| | Comprehensive income under U.S. GAAP                                                            |  |                  | 11,166  |      |  | 40,437 |  |  | 119,235 | 
| |                                                                                                 |  |                  |         |      |  |        |  |  |         | 

|
|
|
|
|

32

---

---

OPHIRTECH LTD.(An Israeli Corporation)
2005 ANNUAL REPORT



---

---



OPHIRTECH LTD.

2005 ANNUAL REPORT

TABLE OF CONTENTS

|                                                     |     
|---------------------------------------------------- | ----
|                                                     | Page
|REPORT OF INDEPENDENT AUDITORS                       | 2   
|FINANCIAL STATEMENTS  IN NEW ISRAELI SHEKELS (NIS): |     
|Balance sheets                                       | 3   
|Statements of
operations                             | 4   
|Statements of changes in
shareholders
  equity      | 5   
|Statements of cash
flows                             | 6   
|Notes to financial
statements                        | 7-19

|
|
|
|

---

---



REPORT OF
INDEPENDENT AUDITORS

To the
shareholders of

OPHIRTECH LTD.

We have audited the financial statements of Ophirtech Ltd. (hereafter -
the Company): balance sheets as of December 31, 2005 and 2004 and the related
statements of income, changes in shareholders equity and cash flows for the
three years ended December 31, 2005. These financial statements are the
responsibility of the Companys board of directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31,
2005 and 2004 and the results of operations and cash flows of the Company for
the three years ended December 31, 2005, in conformity with accounting
principles generally accepted in Israel.

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

Accounting
principles generally accepted in Israel vary in certain significant respects
from accounting principles generally accepted in the United States of America.
Information relating to the nature and effect of such differences is presented
in note 7 to the financial statements.

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

2

---

---



OPHIRTECH LTD.

BALANCE SHEETS

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

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

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

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

3

---

---



OPHIRTECH LTD.

STATEMENTS OF OPERATIONS

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

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

4

---

---



OPHIRTECH LTD.

STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

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

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

5

---

---



OPHIRTECH LTD.

STATEMENTS OF CASH FLOWS

|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|--------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | ---- |  | ----- | - |  | ------ | -
|                                                                                              |  | 2005                           |        | 2004 |  | 2003  |  
|                                                                                              |  |                                |        |      |  |       |  
|                                                                                              |  | NIS in thousands (see note 1b) |       
|                                                                                              |  |                                |       
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                         |  |                                |        |      |  |       |   |  |        |  
|Loss for the year                                                                             |  |                                | (2,996 | )    |  | (142  | ) |  | (1,908 | )
|Adjustments to reconcile net loss to net
  cash provided by (used in) operating activities*   |  |                                | 3,004  |      |  |       |   |  | 714    |  
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|Net cash provided by (used in) operating
  activities                                         |  |                                | 8      |      |  | (142  | ) |  | (1,194 | )
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                         |  |                                |        |      |  |       |   |  |        |  
|Proceeds from disposal of investments                                                         |  |                                | 1,746  |      |  | 1,699 |   |  |        |  
|Investment in companies                                                                       |  |                                | (1,306 | )    |  |       |   |  | (3,089 | )
|Proceeds from sale of fixed assets                                                            |  |                                |        |      |  |       |   |  | 70     |  
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|Net cash provided by (used in) investing
  activities                                         |  |                                | 440    |      |  | 1,699 |   |  | (3,019 | )
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                         |  |                                |        |      |  |       |   |  |        |  
|Short-term credit loans from shareholders -
  net                                             |  |                                | (142   | )    |  | 101   |   |  | 4,166  |  
|Increase in short term loan from a related
  party                                            |  |                                |        |      |  |       |   |  | 191    |  
|Short-term bank credit                                                                        |  |                                | (966   | )    |  | (873  | ) |  | (124   | )
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|Net cash provided by (used in) financing
  activities                                         |  |                                | (1,108 | )    |  | (772  | ) |  | 4,233  |  
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                            |  |                                | (660   | )    |  | 785   |   |  | 20     |  
|BALANCE OF CASH AND CASH EQUIVALENTS AT
  BEGINNING OF YEAR                                   |  |                                | 811    |      |  | 26    |   |  | 6      |  
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|BALANCE OF CASH AND CASH EQUIVALENTS AT END
  OF YEAR                                         |  |                                | 151    |      |  | 811   |   |  | 26     |  
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|* Adjustments to reconcile net loss to net
  cash provided by (used in) operating activities: |  |                                |        |      |  |       |   |  |        |  
|Expenses not involving cash flows:                                                            |  |                                |        |      |  |       |   |  |        |  
|Depreciation                                                                                  |  |                                |        |      |  |       |   |  | 7      |  
|Write-down of investments in companies,
net                                                   |  |                                | 2,814  |      |  |       |   |  | 1,239  |  
|Capital loss on sale of fixed assets                                                          |  |                                |        |      |  |       |   |  | 2      |  
|Linkage differences of a loan from a
  related party                                          |  |                                | 192    |      |  |       |   |  | 165    |  
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|                                                                                              |  |                                | 3,006  |      |  |       |   |  | 1,413  |  
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|Changes in operating asset and liability
  items:                                             |  |                                |        |      |  |       |   |  |        |  
|Decrease (increase) in accounts
receivables                                                   |  |                                | 21     |      |  |       |   |  | (33    | )
|Decrease in accounts payable and accruals                                                     |  |                                | (23    | )    |  |       |   |  | (666   | )
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|                                                                                              |  |                                | (2     | )    |  |       |   |  | (699   | )
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|                                                                                              |  |                                | 3,004  |      |  |       |   |  | 714    |  
|                                                                                              |  |                                |        |      |  |       |   |  |        |  

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

6

---

---



OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS

|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|---------- | --------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES                                                        
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           | The
  significant accounting policies, applied on a consistent basis, are as
  follows:
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           | a.                                                                                      | General:                                                                                                        
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                         | 1)                                                                                                               | Ophirtech
  Ltd. (the Company), invests in start-up companies in various stages of
  development, from newly established enterprises to companies that have reached
  advanced development stage.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                         |                                                                                                                  | On March 30,
  2000, the Company purchased investments in high-tech companies engaged in
  various fields of activity (communications, software, security, etc.) from
  Ophir Holdings Ltd. (Ophir Holdings), which at that time was a company
  under common control, for approximately adjusted NIS 76 million. The
  difference between the proceeds and the carrying value of those investments
  on the books of Ophir Holdings was carried to the Companys accumulated
  deficit, in accordance with the Israeli Securities (Presentation in Financial
  Reports of Acts between Body Corporate and its Controlling Member)
  Regulations, 1996.
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                         | 2)                                                                                                               | Related
  parties - as defined in Opinion 29 of the Israeli Institute.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                         | 3)                                                                                                               | Principles
  of accounting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                         |                                                                                                                  | The
  financial statements have been prepared in accordance with accounting
  principles generally accepted in Israel (Israeli GAAP). Israeli GAAP vary in
  certain significant respects from accounting principles generally accepted in
  the United States of America. Information relating to the nature and effect
  of such differences is presented in note 7.                                                                                                                                                                                                                                                                                   
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           | b.                                                                                      | Financial statements presentation basis:                                                                        
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                         | The company
  draws up and presents its financial statements in Israeli currency (hereafter
  - shekels or NIS).
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                         | 1)                                                                                                               | Transition
  to nominal financial reporting in 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                         |                                                                                                                  | With effect
  from January 1, 2004, the company has adopted the provisions of Israel
  Accounting Standard No. 12 Discontinuance of Adjusting Financial Statements
  for Inflation  of the Israel Accounting Standards Board (hereafter the
  IASB) and, pursuant thereto, the company has discontinued, from the aforesaid
  date, the adjustment of its financial statements for the effects of inflation
  in Israel.                                                                                                                                                                                                                            
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                         |                                                                                                                  | The amounts
  adjusted for the effects of inflation in Israel, presented in the financial
  statements as of December 31, 2003 (hereafter  the transition date), were
  used as the opening balances for the nominal financial reporting in the
  following periods. Additions made after the transition date have been
  included in the financial statements at their nominal values.                                                                                                                                                                                                                                                               
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                         |                                                                                                                  | Accordingly,
  the amounts reported for 2003, as well as reported amounts for subsequent                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

7

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---



OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

|           |                                              |                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---------- | -------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES (continued):
|           |                                              |                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           | b.                                           | Financial statements presentation basis (continued):                                                                                                                                                                                                      
|           |                                              |                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                              |                                                                                                                                                                                                                                                            | periods,
  that relate to non-monetary assets including permanent investment and
  equity items,
  which originate from the period that preceded the transition date, are based
  on the adjusted-for-inflation data (based on the CPI for December 2003), as
  previously reported. All the amounts originating from the period after the
  transition date are included in the financial statements at their nominal
  values.                                                                                                                                   
|           |                                              |                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                              |                                                                                                                                                                                                                                                            | Through
  December 31, 2003, the company prepared its financial statements on the basis
  of historical cost adjusted for the changes in the general purchasing power
  of Israeli currency (NIS), based upon changes in the consumer price index
  (hereafter  the CPI), in accordance with pronouncements of the Institute of
  Certified Public Accountants in Israel (hereafter  the Israeli Institute).                                                                                                                                                     
|           |                                              |                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                              |                                                                                                                                                                                                                                                            | In 2003, the
  components of the income statements were, for the most part, adjusted as
  follows: the components relating to transactions carried out during the
  reported period were adjusted on the basis of the index for the month in
  which the transaction was carried out, while those relating to non-monetary
  balance sheet items were adjusted on the same basis as the related balance
  sheet item. The financing component represents financial income and expenses
  in real terms and the erosion of balances of monetary items during the year.
|           |                                              |                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                              | 2)                                                                                                                                                                                                                                                         | The amounts
  of non-monetary assets do not necessarily represent realization value or
  current economic value, but only the reported amounts of such assets, as
  described in (1) above. In these financial statements, the term cost
  signifies cost in reported amounts.                                                                                                                                                                                                                                                                                     
|           |                                              |                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           | c.                                           | Investments in companies                                                                                                                                                                                                                                  
|           |                                              |                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                              | The
  investments in the shares of these companies are presented at cost net of
  write down for decrease in value, which is not of a temporary nature.                                                                                                   
|           |                                              |                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                              | The Company
  performs from time to time fair value evaluations of its investments in
  start-up and development companies and includes, when necessary, a write-down
  for decrease in value which is not of a temporary nature, see also d.
  hereafter.

8

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---



OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---------- | -------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES (continued):
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           | d.                                           | Impairment of assets:                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                              | 1)                                                                                                                                                                                                                                                                                                                                                                                                                                                              | The company
  reviews - at each balance sheet date - whether any events have occurred or
  changes in circumstances have taken place, which might indicate that there
  has been an impairment of fixed assets and identifiable intangibles. When
  such indicators of impairment are present, the company evaluates whether the
  carrying value of the asset in the companys accounts can be recovered from
  the cash flows anticipated from that asset, and, if necessary, records an
  impairment provision up to the amount needed to adjust the carrying amount to
  the recoverable amount.
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | The
  recoverable value of an asset is determined according to the higher of the
  net selling price of the asset or its value in use to the company. The value
  in use is determined according to the present value of anticipated cash flows
  from the continued use of the asset, including those expected at the time of
  its future retirement and disposal.                                                                                                                                                                                                                                
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                              | 2)                                                                                                                                                                                                                                                                                                                                                                                                                                                              | During 2005,
  the company has written-down its investments in companies in the total amount
  of 2,814 thousands NIS (2004- NIS 0; 2003- NIS 1,239 in thousand).                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           | e.                                           | Loss per NIS 1 of par value of shares                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                              | The
  financial statements do not include data regarding loss per NIS 1 of par
  value of shares, since the data would not provide significant additional
  information to that otherwise provided by the financial statements.                                                                                                                                                                                                                                
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           | f.                                           | Linkage basis                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                              | Balances the
  linkage arrangements in respect of which stipulate linkage to the last index
  published prior to date of payment are stated on basis of the last index
  published prior to balance sheet date (the index for November).                                                                                                                                                                                                                       
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           | g.                                           | Use of estimates in the preparation of financial statements                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                              | The
  preparation of financial statements in conformity with generally accepted
  accounting principles requires management to make estimates and assumptions
  that affect the reported amounts of assets and liabilities and disclosure of
  contingent assets and liabilities at the dates of the financial statements
  and the reported amounts of revenues and expenses during the reporting
  periods. Actual results could differ from those estimates.

9

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---



OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

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

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

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

10

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OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

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

11

---

---



OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

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

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

| |     |                                                                                                                                                                                                                                                                               
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Pelican is
  engaged in the development of solutions to the problem of safeguarding
  information on the Internet against viruses and hackers.                                                                                                                                
| |     |                                                                                                                                                                                                                                                                               
| |     | In February
  2003, Pelican sold the know-how that it had developed and owned.Pelican was
  appointed an outside liquidator who, in 2005, had transferred to the company
  an aggregate of NIS 626,000 out of the liquidation monies.                                         
| |     |                                                                                                                                                                                                                                                                               
| | (b) | Expand is
  engaged in the development of technology designed to accelerate
  communications over diverse network infrastructures (including E1, T1 and
  frame relay lines) and improve broadband efficiency.                                                                
| |     |                                                                                                                                                                                                                                                                               
| |     | In June
  2003, as part of a Capital raise from existing shareholders in Expand, the
  Company invested an addition amount of $ 250,000 (NIS 1,084,000) in Expand.
  During April 2005, the Company gave a bridging loan to Expand in the amount
  of $ 150,000 (NIS 653,000).
| |     |                                                                                                                                                                                                                                                                               
| | (c) | Mainsoft is
  engaged in the development of software and tools for software developers.                                                                                                                                                                                       

12

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---



OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

|           |                                       |                                                                                                                                                                                                                                                                
|---------- | ------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2    | INVESTMENTS IN COMPANIES (continued):
|           |                                       |                                                                                                                                                                                                                                                                
|           | (d)                                   | Netformx is
  engaged in development, marketing and support of software designed for
  planning, operation and maintenance of computer networks.                                                                                                               
|           |                                       |                                                                                                                                                                                                                                                                
|           |                                       | The
  investment in Netformx as of December 31, 2005 is presented net of a provision
  of NIS 7.6 million for impairment of value.                                                                                                                             
|           |                                       |                                                                                                                                                                                                                                                                
|           |                                       | Netformx is
  partly held by companies which are related parties.                                                                                                                                                                                              
|           |                                       |                                                                                                                                                                                                                                                                
|           | (e)                                   | StoreAge is
  engaged in the development and marketing of a software solution and
  innovative data storage solutions for communications networks (Storage Area
  Network).                                                                                    
|           |                                       |                                                                                                                                                                                                                                                                
|           |                                       | During
  February 2005, the company gave a bridging loan to Storeage ,in the amount of
  $ 150,000 (NIS 653,000).                                                                                                                                              
|           |                                       |                                                                                                                                                                                                                                                                
|           |                                       | StoreAge is
  partly held by a company which is related party.                                                                                                                                                                                                 
|           |                                       |                                                                                                                                                                                                                                                                
|           | (f)                                   | Celvibe
  develops solutions for digital video transmission for Internet broadband
  networks and mobile phone communications.                                                                                                                                 
|           |                                       |                                                                                                                                                                                                                                                                
|           |                                       | In November
  2002, Celvibe ceased its operations and entered a winding-up procedure.                                                                                                                                                                          
|           |                                       |                                                                                                                                                                                                                                                                
|           |                                       | On December
  7, 2004, an amount of $ 393,000 was received from Celvibes liquidator, and On
  June 30, 2005, an amount of $ 245,000 was received.                                                                                                             
|           |                                       |                                                                                                                                                                                                                                                                
|           |                                       | As of
  December 31, 2005, the balance of the investment is set at zero and the
  company is not expecting to receive an additional amounts from the
  liquidation of Celvibe.                                                                                 
|           |                                       |                                                                                                                                                                                                                                                                
|           | (g)                                   | Viola is
  engaged in the development of a software system to allow quick and
  uninterrupted identifications of problems and technical difficulties on
  various communications networks.                                                                     
|           |                                       |                                                                                                                                                                                                                                                                
|           |                                       | In October
  2003, the Company invested $ 150,000 (NIS 668,000) in Viola.                                                                                                                                                                                      
|           |                                       |                                                                                                                                                                                                                                                                
|           |                                       | The
  investment in Viola as of December 31, 2005 is presented net of a provision
  of NIS 8 million for impairment of value.                                                                                                                                  
|           |                                       |                                                                                                                                                                                                                                                                
|           | (h)                                   | Cerel
  develops ceramic layering technologies for the passive electronic components
  market.                                                                                                                                                                 
|           |                                       |                                                                                                                                                                                                                                                                
|           |                                       | In 2002, the
  company recorded an impairment provision of NIS 980,000 in respect of the
  investment. In 2005, due to adverse indicators, the company wrote off the
  balance of its investment in Cerel and recorded an impairment loss of NIS 3.3
  million.

13

---

---



OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

|           |                                       |                                                                                                                                                                                |                                         
|---------- | ------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------
|NOTE 2    | INVESTMENTS IN COMPANIES (continued):
|           |                                       |                                                                                                                                                                               
|           | (i)                                   | Following is
  a list of the companies in which the Company has invested approximately NIS
  58 million. An impairment provision has been made for the full amount
  invested:
|           |                                       |                                                                                                                                                                                |                                         
|           |                                       |                                                                                                                                                                                | Cipheractive
  Ltd;                     
|           |                                       |                                                                                                                                                                                | Carmel
  Biosensors Ltd;                
|           |                                       |                                                                                                                                                                                | Elpas
  Electro-Optic Systems Ltd       
|           |                                       |                                                                                                                                                                                | Romidot Ltd;                            
|           |                                       |                                                                                                                                                                                | RealM
  Technologies Ltd;               
|           |                                       |                                                                                                                                                                                | Camelot
  Information Technologies Ltd; 
|           |                                       |                                                                                                                                                                                | Interlink
  Computer Communications Ltd;
|           |                                       |                                                                                                                                                                                | Techimage
  Ltd;                        
|           |                                       |                                                                                                                                                                                | Indox online
  ltd.                     
|           |                                       |                                                                                                                                                                                | Iradius.Com,
  Inc;                     
|           |                                       |                                                                                                                                                                                | Trans4u Ltd;                            
|           |                                       |                                                                                                                                                                                | Praxell Inc;                            
|           |                                       |                                                                                                                                                                                | Electrochemical
  Light Switch Inc;     

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

14

---

---



OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

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

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

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

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

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

15

---

---



OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

|           |                                                           |                                                                                                                                                                                     
|---------- | --------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 6    | SUPPLEMENTARY FINANCIAL STAEMENT INFORMATION (continued):
|           |                                                           |                                                                                                                                                                                     
|           | c.                                                        | Concentrations of credit risks                                                                                                                                                      
|           |                                                           |                                                                                                                                                                                     
|           |                                                           | The
  Companys cash at December 31, 2005 and 2004 were deposited with Israeli
  banks. The Company is of the opinion that the credit risk in respect of these
  balances is remote.
|           |                                                           |                                                                                                                                                                                     
|           | d.                                                        | Fair value of financial instruments                                                                                                                                                 
|           |                                                           |                                                                                                                                                                                     
|           |                                                           | The fair
  value of the financial instruments included in working capital of the Company
  is usually identical or close to their carrying value.                                   
|           |                                                           |                                                                                                                                                                                     
|           | Statements of operations -                               
|           |                                                           |                                                                                                                                                                                     
|           | e.                                                        | General and administrative expenses:                                                                                                                                                

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

16

---

---



OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

|           |                                                                                                                 |          |                                                                                                                                                                                                                                                                                                                                                                                                
|---------- | --------------------------------------------------------------------------------------------------------------- | -------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 7    | EFFECT OF
  MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN
  ISRAEL AND IN THE U.S.A:
|           |                                                                                                                 |          |                                                                                                                                                                                                                                                                                                                                                                                                
|           | a.                                                                                                              | General:
|           |                                                                                                                 |          |                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                                                                                                 | 1)       | The Company
  prepares its financial statements in accordance with Israeli GAAP. As
  applicable to these financial statements, Israeli GAAP and U.S. of America
  GAAP vary in certain significant respects, as described below:                                                                                                                                                              
|           |                                                                                                                 |          |                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                                                                                                 | 2)       | Effect of
  inflation                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                                                 |          |                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                                                                                                 |          | In
  accordance with Israeli GAAP, through December 31, 2003, the Company
  comprehensively included the effect of the changes in the general purchasing
  power of Israeli currency in these financial statements, as described in note
  1b. In view of the past inflation in Israel, this was considered a more
  meaningful presentation than financial reporting based on historical cost.
|           |                                                                                                                 |          |                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                                                                                                 |          | Under US
  GAAP Israel is not considered to be a highly inflationary country, thus the
  measurement currency should be in nominal NIS.The adjustments to reflect the
  changes in the general purchasing power of Israeli currency have been
  reversed in the reconciliation of Israeli GAAP to U.S. GAAP.                                                                                   

17

---

---



OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

|           |                                                                                                                             |                                                                                                                                    |                     
|---------- | --------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | --------------------
|NOTE 8    | EFFECT OF
  MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN
  ISRAEL AND IN THE U.S.A (continued):
|           |                                                                                                                             |                                                                                                                                    |                     
|           | b.                                                                                                                          | The effect
  of the material GAAP differences, as described in a. above, on the
  consolidated financial statements is as follows:
|           |                                                                                                                             |                                                                                                                                    |                     
|           |                                                                                                                             | 1)                                                                                                                                 | Operating
  results:

| |                                                                                   |  |                  |       |      |  |      |  |  |       |  
| | --------------------------------------------------------------------------------- |  | ---------------- | ----- | ---- |  | ---- |  |  | ----- | -
| |                                                                                   |  | 2005             |       | 2004 |  | 2003 | 
| |                                                                                   |  |                  |       |      |  |      | 
| |                                                                                   |  | NIS in thousands |      
| |                                                                                   |  |                  |      
|
| | Net losses as reported in these financial
  statements according to Israeli GAAP) |  |                  | 2,996 |      |  | 142  |  |  | 1,908 |  
| | Effect of the treatment of the following
  item under U.S. GAAP-                  |  |                  |       |      |  |      |  |  |       |  
| | Reversal of the adjustment due to effect of
  inflation                           |  |                  | (50   | )    |  | -,-  |  |  | (371  | )
| |                                                                                   |  |                  |       |      |  |      |  |  |       |  
| | Net losses under U.S. GAAP                                                        |  |                  | 2,946 |      |  | 142  |  |  | 1,537 |  
| |                                                                                   |  |                  |       |      |  |      |  |  |       |  

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

| |                                                                                              |  |                  |        |      |  |        |   |  |  | 
| | -------------------------------------------------------------------------------------------- |  | ---------------- | ------ | ---- |  | ------ | - |  |  | 
| |                                                                                              |  | December 31,     |        |     
| |                                                                                              |  |                  |        |     
| |                                                                                              |  | 2005             |        | 2004 |  |       
| |                                                                                              |  |                  |        |      |  |       
| |                                                                                              |  | NIS in thousands |        |     
| |                                                                                              |  |                  |        |     
|
| | Shareholders equity, as reported in these
  financial statements, according to Israeli GAAP |  |                  | 20,557 |      |  | 23,553 |   | 
| | Effect of the treatment of the above
  differences under U.S. GAAP:                          |  |                  |        |      |  |        |   | 
| | Reversal of the adjustment due To effect of
  inflation, net                                 |  |                  | (2,006 | )    |  | (2,056 | ) | 
| | Transaction with related party                                                               |  |                  | 800    |      |  | 800    |   | 
| |                                                                                              |  |                  |        |      |  |        |   | 
| | Shareholders equity under U.S. GAAP                                                         |  |                  | 19,351 |      |  | 22,297 |   | 
| |                                                                                              |  |                  |        |      |  |        |   | 

| |  |    |                                                                                                                  
| |  | -- | -----------------------------------------------------------------------------------------------------------------
| |  | 3) | The company
  has no other comprehensive income (loss) components other than net loss for
  the reported periods.

|
|
|
|

18

---

---

REPORT
OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM TO THE SHAREHOLDERS OF AM-HAL LTD.

We have audited the accompanying
balance sheets of Am-Hal Ltd. (the Company) and the consolidated balance
sheets of the Company and a consolidated partnership as of December 31, 2003 and 2002, and
the related statements of operations, changes in shareholders deficiency and cash
flows  of the Company and on a consolidated basis  for each of the three years
in the period ended December 31, 2003. These financial statements are the responsibility
of the Companys Board of Directors and management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance
with standards of the Public Company Accounting Oversight Board (United States). 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 also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position  of the Company and on a consolidated basis  as of December 31, 2003
and 2002, and the results of operations, changes in shareholders deficiency and cash
flows  of the Company and on a consolidated basis  for each of the three years
in the period ended December 31, 2003 in conformity with accounting principles generally
accepted in Israel which, with respect to these financial statements, differ in certain
respects from the accounting principles generally accepted in the United States of
America. See Note 25 to the financial statements that describe the material differences.

As explained in Note 2B, these
financial statements are presented in values adjusted for the changes in the general
purchasing power of the Israeli currency, in accordance with pronouncements of the
Institute of Certified Public Accountants in Israel.

Brightman Almagor &
Co.Certified Public
AccountantsA member firm of Deloitte Touche
Tohmatsu

Tel Aviv, February 15,
2004



---

---



# INDEPENDENT
AUDITORS SPECIAL REPORT

We have audited the balance sheets of
Am-Hal Ltd. (the Company) and the consolidated balance sheets of the Company
and a consolidated partnership as of December 31, 2003 and 2002, and the related
statements of operations, changes in shareholders deficiency and cash flows 
of the Company and on a consolidated basis  for each of the three years in the
period ended December 31, 2003, and have issued our unqualified report thereon dated
February 15, 2004. The aforementioned financial statements (not presented separately
herein) were prepared in new Israeli shekels (NIS) on the historical cost basis, adjusted
for changes in the general purchasing power of the NIS in accordance with standards
established by the Institute of Certified Public Accountants in Israel.

As described in Note 2B, the
accompanying Company and consolidated financial data in U.S. dollars as of the
abovementioned dates and for the abovementioned years then ended were prepared on the
basis of financial data in nominal NIS (the basis on which the Company and consolidated
adjusted NIS financial statements were also prepared), translated into US dollars in
accordance with the principles described in Note 2B.

In our opinion, the accompanying
financial data in US dollars was translated in accordance with the principles described in
Note 2B.

This report is intended solely for
the information and use of the Boards of Directors and management of the Company and
Ampal-American Israel Corp., and should not be used for any other purpose.

Brightman Almagor & Co.
Certified Public Accountants
A member firm of Deloitte Touche Tohmatsu

Tel Aviv, February 15,
2004



---

---



# INDEPENDENT
AUDITORS REPORT TO THE SHAREHOLDERS OF BAY HEART LTD. AND
SUBSIDIARY

We have audited the accompanying
balance sheets of Bay Heart Ltd. (the Company) as of December 31, 2005 and
2004, and the consolidated balance sheets as of those dates, and the related statements of
operations, changes in shareholders deficiency and cash flows  of the Company
and on a consolidated basis  for each of the three years in the period ended
December 31, 2005. These financial statements are the responsibility of the Companys
Board of Directors and management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position  of the Company and on a consolidated basis  as of December 31, 2005
and 2004, and the results of operations, changes in shareholders deficiency and cash
flows  of the Company and on a consolidated basis  for each of the three years
in the period ended December 31, 2005, in conformity with accounting principles generally
accepted in Israel.

Accounting principles generally
accepted in Israel differ in certain respects from accounting principles generally
accepted in the United States. With respect to these financial statements, the difference
in the application of the latter is described in Note 19.

As described in Note 2A, the
financial statements are presented in reported amounts, in conformity with Accounting
Standards of the Israel Accounting Standards Board.

The condensed consolidated financial
information in U.S. dollars presented in Note 18 to the financial statements, prepared at
the request of an investor, represents a translation of the Companys financial
statements in nominal values, as stated in Note 18A. In our opinion, such translation into
U.S. dollars was appropriately performed on the basis stated in Note 18A.



---

---



As described in Note 1C to the
financial statements regarding the Companys business condition, the Company has
ongoing losses, a working-capital deficit, shareholders deficiency and negative cash
flows from operating activities. As stated in that note, the continuance of the
Companys operations and its ability to satisfy its short-term liabilities is
contingent upon the attainment of financing from the shareholders and/or bank financing
arrangements. The Companys management is currently negotiating with a bank for
rescheduling its short-term credit as a long-term loan.

Brightman Almagor & Co.
Certified Public Accountants
Member firm of Deloitte Touche Tohmatsu
Haifa, Israel, February 22, 2006.



---

---



# REPORT OF INDEPENDENT
PUBLIC ACCOUNTING FIRM

# To the Shareholders of

# CARMEL CONTAINER
SYSTEMS LTD.

We
have audited the accompanying balance sheets of Carmel Container Systems Ltd. (the
Company) as of December 31, 2005 and 2004, and the consolidated balance sheets as of
such dates and the related statements of operations, changes in shareholders equity
and cash flows  Company and consolidated  for each of the three years in the
period ended December 31, 2005. These financial statements are the responsibility of the
Companys board of directors and management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We
did not audit the financial statements of a certain subsidiary, whose assets constitute
approximately 10% and 8% of total consolidated assets as of December 31, 2005 and 2004,
respectively, and whose revenues included in consolidation constitute approximately 10%,
9% and 8% of total consolidated revenues for the years ended December 31, 2005, 2004
and 2003, 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 the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit of the companys
internal control over financial reporting. Our audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits and
the reports of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits
and the reports of other auditors, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial position of
 the Company and its subsidiaries as of December 31, 2005 and 2004, and the consolidated
results of their operations and cash flows for each of the three years in the period
ended of December 31, 2005, in conformity with Israel generally accepted accounting
principles, which differ in certain respects from those followed in the United States, as described in Note 22 to the consolidated financial statements.

|               |                                 
|-------------- | --------------------------------
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|
|Haifa, Israel, | KOST FORER GABBAY & KASIERER    
|March 6, 2006  | A Member of Ernst & Young Global



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Report of
Independent Registered Public Accounting Firm

To the shareholders of

# C.D. PACKAGING SYSTEMS
LTD.

We have audited the financial
statements of C.D. Packaging Systems Ltd. (hereafter  the Company) and
the consolidated financial statements of the Company and its consolidated subsidiary:
balance sheets as of December 31, 2005 and 2004 and statements of income (loss),
changes in shareholders equity and cash flows for each of the three years in the
period ended December 31, 2005. These financial statements are the responsibility of
the Companys board of directors and management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the aforementioned
financial statements present fairly, in all material respects, the financial position of
the Company as of December 31, 2005 and 2004 and the results of operations, changes
in shareholders equity and cash flows  of the Company and consolidated 
for each of the three years in the period ended December 31, 2005, in conformity
with accounting principles generally accepted (GAAP) in Israel. Also, in our
opinion, except for failure to meet the requirements of the Securities Regulations
(Presentation of Transactions between a Corporation and its Controlling Shareholder in the
Financial Statements), 1996, as explained in note 11, and except for the exclusion of
certain specifications, as explained in that note, the abovementioned financial statements
have been prepared in accordance with the Securities (Preparation of Annual Financial
Statements) Regulations, 1993.

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

Haifa,      March
6, 2006

/s/ KESSELMAN & KESSELMAN CPAs (ISR) A member of
pricewaterhouseCoopers International Limited



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# CORAL WORLD
INTERNATIONAL LTD.

# REPORT OF INDEPENDENT
AUDITORSTO THE SHAREHOLDERSOF CORAL WORLD
INTERNATIONAL LTD.

We have audited the accompanying
consolidated balance sheets of Coral World International Ltd. (the
Company) as of December 31, 2005 and 2004, 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, 2005. These financial statements are the
responsibility of the Board of Directors and management of the Company. Our responsibility
is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position of Coral World International Ltd. as of December 31, 2005 and 2004, and the
results of its operations, changes in shareholders equity and cash flows for each of
the three years in the period ended December 31, 2005, in conformity with accounting
principles generally accepted in the United States of America.

| |                                    
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| | Fahn Kanne & Co.                   
| | Certified Public Accountants (Isr.)

Tel-Aviv, Israel, March
26, 2006



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# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the shareholders of

# EPSILON INVESTMENT HOUSE
LTD.

We
have audited the balance sheets of Epsilon Investment House Ltd. (the
Company) as of December 31, 2004 and 2003, and the consolidated balance sheets
as of such date and the related statements of income, changes in shareholders equity
and cash flows  Company and consolidated  for the years then ended expressed
in New Israeli Shekels (not presented herein). These financial statements are the
responsibility of the Companys board of directors and management. Our responsibility
is to express an opinion on these financial statements based on our audits. The financial
statements of an investee company have been audited by other auditors whose report has
been furnished to us; insofar as our opinion on the consolidated financial statements
relates to the amounts included for the investee, it is based solely on their report. In
the consolidated financial statements, the Companys investment in the investee is
stated at NIS 331 thousand and NIS 26 thousand, respectively, at December 31, 2004 and
2003, and the Companys equity in the net income of the investee is stated at NIS 305
thousand and NIS 25 thousand for the years then ended.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States) and in accordance with auditing standards generally
accepted in Israel, including those prescribed by the Auditors Regulations
(Auditors Mode of Performance)-1973. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Companys internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by the board of directors and management,
as well as evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our opinion.

In
our opinion, based on our audits and the report of other auditors, the financial
statements referred to above present fairly, in all material respects, the financial
position  of the Company and consolidated  as of December 31, 2004 and
2003, and the results of operations, changes in shareholders equity and cash flows
 of the Company and consolidated  for the years then ended, in conformity with
generally accepted accounting principles in Israel, which differ in certain respects from
those generally accepted in the United States (see Note 20 to the financial statements).

As
described in Note 2a, the financial statements as of the dates and for the reported
periods subsequent to December 31, 2003, are presented in reported amounts, in conformity
with Accounting Standards of the Israeli Accounting Standards Board. The financial
statements as of the dates and for the reported periods until the aforementioned date are
presented in values that were adjusted until that date according to the changes in the
general purchasing power of the Israeli currency, in accordance with pronouncements of the
Institute of Certified Public Accountants in Israel.

|                   |                                 
|------------------ | --------------------------------
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|Tel-Aviv, Israel   | KOST FORER GABBAY & KASIERER    
|February 24 , 2005 | A Member of Ernst & Young Global



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# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders of

Hod Hasharon Sport Center
Limited

We have audited the consolidated
balance sheets of Hod Hasharon Sport Center Limited and its subsidiaries as of
December 31, 2005 and 2004 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, 2005. These financial statements are the responsibility of
the Companys Board of Directors and management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of
December 31, 2005 and 2004 and the consolidated results of operations, changes in
shareholders equity and cash flows for each of the three years in the period ended
December 31, 2005, in conformity with accounting principles generally accepted in the
United States of America.

Somekh Chaikin
Certified Public Accountants (Isr)
February 28, 2006



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# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders of

Hod Hasharon Sport Center
(1992) Limited Partnership

We have audited the consolidated
balance sheets of Hod Hasharon Sport Center (1992) Limited Partnership and its
subsidiaries as of December 31, 2005 and 2004 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, 2005. These financial statements are the
responsibility of the Companys Board of Directors and management. Our responsibility
is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of
December 31, 2005 and 2004 and the consolidated results of operations, changes in
shareholders equity and cash flows for each of the three years in the period ended
December 31, 2005, in conformity with accounting principles generally accepted in the
United States of America.

Somekh Chaikin
Certified Public Accountants (Isr)
February 28, 2006



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# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the shareholders of

# RENAISSANCE INVESTMENT
COMPANY LTD.

We
have audited the balance sheets of RenaissanceInvestment Company Ltd.(the Company) as of December 31, 2004 and 2003, and the consolidated
balance sheet as of December 31, 2004, and the related statements of income, changes in
shareholders equity and cash flows of the Company for the years ended December 31,
2004 and 2003 and the consolidated statements of income and cash flows for the year ended
December 31, 2004, expressed in New Israeli Shekels (not presented herein). These
financial statements are the responsibility of the Companys board of directors and
management. Our responsibility is to express an opinion on these financial statements
based on our audits. The financial statements of an investee company have been audited by
other auditors whose report has been furnished to us; insofar as our opinion on the
financial statements relates to the amounts included for the investee, it is based solely
on their report. In the financial statements, the Companys investment in the
investee is stated at NIS 3,571 thousand and NIS 1,070 thousand, respectively, at December
31, 2004 and 2003, and the Companys equity in the net income of the investee is
stated at NIS 501 thousand and NIS 70 thousand for the years then ended.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States) and in accordance with auditing standards generally
accepted in Israel, including those prescribed by the Auditors Regulations
(Auditors Mode of Performance)-1973. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Companys internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by the board of directors and management,
as well as evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our opinion.

In
our opinion, based on our audits and the report of other auditors, the financial
statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2004 and 2003, and the consolidated
financial position as of December 31, 2004 and the results of operations, changes in
shareholders equity and cash flows of the Company for the years ended December 31,
2004 and 2003 and the consolidated results of operations and cash flows for the year ended
December 31, 2004, in conformity with generally accepted accounting principles in Israel,
which differ in certain respects from those generally accepted in the United States (see
Note 15 to the financial statements).

As
described in Note 2a, the financial statements as of the dates and for the reported
periods subsequent to December 31, 2003, are presented in reported amounts, in conformity
with Accounting Standards of the Israeli Accounting Standards Board. The financial
statements as of the dates and for the reported periods until the aforementioned date are
presented in values that were adjusted until that date according to the changes in the
general purchasing power of the Israeli currency, in accordance with pronouncements of the
Institute of Certified Public Accountants in Israel.

|                   |                                 
|------------------ | --------------------------------
|
|
|
|
|Tel-Aviv, Israel   | KOST FORER GABBAY & KASIERER    
|February 24 , 2005 | A Member of Ernst & Young Global



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