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

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

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# (Mark One)

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

For the fiscal year ended
December 31, 2004

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)

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

Yes   x    No o

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

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

Yes  o   No   x

The
aggregate market value of the registrants voting stock held by non  affiliates
of the registrant on June 30, 2004, the last business day of the registrants most
recently completed second fiscal quarter was $25,947,900 based upon the closing market
price of such stock on that date. As of February 25, 2005, the number of shares
outstanding of the registrants Class A Stock, its only authorized and
outstanding common stock is 19,942,996.

1

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# AMPAL-AMERICAN ISRAEL
CORPORATION AND SUBSIDIARIES

Index to Form 10-K

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

Part I.

| | Item 1. | Business | 3
| | ------- | -------- | -

| | Item 2. | Property | 16
| | ------- | -------- | --

| | Item 3. | Legal Proceedings | 17
| | ------- | ----------------- | --

| | Item 4. | Submission of Matters to a Vote of Security Holders | 18
| | ------- | --------------------------------------------------- | --

Part II.

| | Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 19
| | ------- | ------------------------------------------------------------------------------------------------------------ | --

| | Item 6. | Selected Financial Data | 20
| | ------- | ----------------------- | --

| | Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 21
| | ------- | ------------------------------------------------------------------------------------- | --

| | Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 31
| | -------- | ---------------------------------------------------------- | --

| | Item 8. | Financial Statements and Supplementary data | 33
| | ------- | ------------------------------------------- | --

| | Item 9. | Changes in and Disagreements with Accountants On Accounting and Financial Disclosure | 62
| | ------- | ------------------------------------------------------------------------------------ | --

| | Item 9A. | Controls and Procedures | 62
| | -------- | ----------------------- | --

| | Item 9B. | Other Information | 62
| | -------- | ----------------- | --

Part III.

| | Item 10. | Directors and Executive Officers of the Registrant | 63
| | -------- | -------------------------------------------------- | --

| | Item 11. | Executive Compensation | 66
| | -------- | ---------------------- | --

| | Item 12. | Security Ownership of Certain Beneficial Owners and Management | 70
| | -------- | -------------------------------------------------------------- | --

| | Item 13. | Certain Relationships and Related Transactions | 72
| | -------- | ---------------------------------------------- | --

| | Item 14. | Principal Accounting Fees and Services | 72
| | -------- | -------------------------------------- | --

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, 2004 
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 14 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: Telecommunications, Real Estate and Project
Development, Energy, Leisure Time and High Technology. We believe that past experience,
current opportunities and a deep understanding of the above-referenced sectors both
domestically in Israel and internationally will allow the Company to bring high returns to
its shareholders. The Company emphasizes investments which have long-term growth potential
over investments which yield short-term returns.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Listed
below by industry segment are all of the substantial investee companies in which the
Company had ownership interests during the fiscal year ended December 31, 2004, 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, 2004(1)
|-------------------------------------------- | ------------------ | -------------------------------------
|
|
|
|
|Telecommunication                            |                    |                                      
|MIRS Communications Ltd.                     |                    |                                      
|                                             |                    |                                      
|Telecom Partners                             |                    |                                      
|                                             |                    |                                      
|Real Estate                                  |                    |                                      
|Am-Hal Ltd                                   |                    |                                      
|Ampal (Israel) Ltd                           |                    |                                      
|Bay Heart Limited                            |                    |                                      
|Ophir Holdings Ltd. ("Ophir Holdings")       |                    |                                      
|Industrial Buildings Corporation Ltd. (TASE) |                    |                                      
|Lysh The Coastal High-way Ltd                |                    |                                      
|Meimadim Investments Ltd                     |                    |                                      
|New Horizons (1993) Ltd.                     |                    |                                      
|Shmey-Bar Group                              |                    |                                      
|                                             |                    |                                      
|Leisure-Time                                 |                    |                                      
|Coral World International Limited            |                    |                                      
|Country Club Kfar Saba Limited               |                    |                                      
|Hod Hasharon Sport Center (1992)             |                    |                                      
|Limited Partnership                          |                    |                                      
|                                             |                    |                                      
|                                             |                    |                                      
|High-Technology and Communications           |                    |                                      
|Babylon Ltd                                  |                    |                                      
|Clalcom Ltd.                                 |                    |                                      
|Courses Investment in Technology Ltd.        |                    |                                      
|Identify Solutions Ltd.                      |                    |                                      
|Modem Art Ltd.                               |                    |                                      
|Netformx Ltd.                                |                    |                                      
|Oblicore Ltd.                                |                    |                                      
|Ophirtech Ltd. ("Ophirtech")                 |                    |                                      
|Cerel Ceramic Technologies Ltd.              |                    |                                      
|Expand Networks Ltd.                         |                    |                                      
|Mainsoft Corporation Ltd.                    |                    |                                      
|StoreAge Networking Technologies Ltd.        |                    |                                      
|Viola Networks                               |                    |                                      
|PowerDsine Ltd (NASDAQ) (PDSN)               |                    |                                      
|ShellCase Ltd.                               |                    |                                      
|Shiron Satellite Communications (1996) Ltd.  |                    |                                      
|Smart Link Ltd.                              |                    |                                      
|VisionCare Ophthalmic Technologies           |                    |                                      
|Xpert Integrated Systems Ltd.                |                    |                                      
|                                             |                    |                                      
|Capital Markets and Other Holdings           |                    |                                      
|Ampal Development (Israel) Ltd.              |                    |                                      
|Ampal Holdings (1991)  Ltd.                  |                    |                                      
|Carmel Container Systems Limited             |                    |                                      
|(AMEX:KML)                                   |                    |                                      
|Epsilon Investment House Ltd.                |                    |                                      
|Fimi Opportunity Fund, L.P.                  |                    |                                      
|Renaissance Investment Company Ltd.          |                    |                                      

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

4

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|(2) | As of December 31, 2004, Ophirtech held the following percentage interests:
|--- | ---------------------------------------------------------------------------
|    | Cerel Ceramic Technologies Ltd.                                            
|    | Expand Networks Ltd.                                                       
|    | Mainsoft Corporation Ltd.                                                  
|    | Netformx Ltd.                                                              
|    | StoreAge Networking Technologies Ltd.                                      
|    | Viola Networks                                                             
|    |                                                                            



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



|(3) | As of December 31, 2004, Ophir Holdings held the following percentage interests:
|--- | --------------------------------------------------------------------------------
|    | Courses
Investment in Technology Ltd.                                           
|    | Industrial Buildings Corporation Ltd.                                           
|    | Lysh The Coastal High-way Ltd.                                                  
|    | Meimadim Investments Ltd.                                                       
|    | New Horizons (1993) Ltd.                                                        
|    | Shmey-Bar (I.A.) 1993, Ltd., Shmey-Bar (T.H.)                                   
|    | 1993 Ltd. and Shmey-Bar Real Estate (1993) Ltd.                                 
|    |                                                                                 



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



Significant Developments Since the Fiscal Year Ended December 31, 2004

In 2005, the Company sold all
of its remaining interest in Industrial Buildings Company for $15.5 million ($6.9 million directly and $8.6
million indirectly through Ophir Holdings Ltd.). The Company's share in  the net gain is approximately $3.9 million.

In March 2005, the Company sold all of its holdings in Modem Art Ltd. for approximately $5 million.  The Company expects to record a gain of approximately $4 million.

Telecommunications

MIRS COMMUNICATIONS LTD. ("MIRS")

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

The main goal of MIRS is to provide cellular service to the commercial, governmental, public and private sectors according to quality standards set by Motorola, in order to give a full and satisfying solution to all wireless communications needs.  MIRS had over 300,000 subscribers mainly in the commercial, governmental, municipal, security and military sectors.





In 2004, the Israeli Ministry of Communications (MOC) issued two substantial decisions which might eventually impact MIRS.  In July, 2004, the MOC granted a PTT license to local wireless service providers.  Previously, MIRS was the only licensed provider of PTT services in Israel. In November the MOC decided to reduce connectivity charges charged by telecommunications providers in accordance with a pre-determined reduction plan to be completed in 2008.

5

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As of December 31, 2004, the Company has taken a $30 million impairment charge on its investment in MIRS.  This charge is discussed in greater detail in Item 7 below.

In May 2004, Ampal filed a claim in the Tel Aviv District Court against Motorola Communications Israel Ltd., Motorola Israel Ltd., MIRS Communications Ltd. and certain MIRS directors appointed by Motorola.  For a discussion of these claims, please see "Legal Proceedings" set forth below.

TELECOM PARTNERS ("TP")

In February 2004, the company invested EUR 4.9 million (approximately US$5.8 million) in Telecom Partners, 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. and Grapes Communications N.V./S.A.  During the third quarter of 2004, PSInet Europe sold all its assets to certain other 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 of Ampal's investment in TP is $1.2 million.

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.

INDUSTRIAL BUILDINGS LTD.  ("INDUSTRIAL BUILDINGS")

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



Ampal's ownership interest in Industrial Buildings is held through its interest in Ophir Holdings. As of December 31, 2004, Ophir Holdings' owned a 10.3% interest in Industrial Buildings.

6

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Ophir Holdings' interest in Industrial Buildings is subject to foreclosure in the event of a default by any of the investors under the bank credit agreements entered into in connection with the original acquisition of Industrial Buildings from the Government of Israel in 1993.  Any amounts distributed as a dividend by Industrial Buildings are required to be applied first to pay then-due borrowings.  For a discussion of the sale of the shares of Industrial Buildings in 2005, please see "Significant Developments Since the Fiscal Year Ended December 31, 2004" above.

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.

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.

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 two acres of land in an industrial park in Netanya, Israel together with an unrelated party. These parties entered into a joint venture agreement regarding the site on which they developed a 326,000 square foot building (including parking) for both industrial and commercial use. Ophir Holdings has a 70% interest in the property and joint venture.  Ophir Holdings' lease revenues from the building were $1.6 in 2004 and 2003.

Ophir Holdings owns a 22.2% interest in the Shmey-Bar group of companies ("Shmey-Bar"). Shmey-Bar acquired 2.3 million square feet of real estate properties from Hamashbir Hamerkazi, Ltd. ("Hamashbir Hamerkazi") for $27.7 million. In the same transaction, Shmey-Bar received an option to acquire, for $26.3 million, an additional 700,000 square feet of real estate properties from Hamashbir Hamerkazi. These properties are situated in various locations in Israel. Ophir Holdings' interest in Shmey-Bar was acquired with an investment of $1.4 million accompanied by a $6.2 million shareholder's loan.

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.  The project, consisting of approximately 100,000 square feet, has been completed at a construction cost of $18 million, including the cost of the land.  Ophir Holdings' owns a 25% direct interest in BHL (its share in the project being 12.5%).

Ophir Holdings has also undertaken to provide guarantees in an amount equivalent to 25% of the construction costs.  As of December 31, 2004, BHL had taken out bank loans of approximately $14.1 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.

7

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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 will start in the second quarter of 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 approximately 1,004,000 visitors during 2004. Coral World has approximately 220 full-time equivalent positions as of December 31, 2004.

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

COUNTRY CLUB KFAR SABA LIMITED ("KFAR SABA")

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

The Club, which has a capacity of 2,000 member families, had approximately 1,900 member families for the 2004 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 threeyears.  In 2004, the H.H. Club repaid owner's loans of $0.2 million to each of the partners.  As of December 31, 2004, the Company holds a 50% direct interest in Hod Hasharon.

8

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High Technology

IDENTIFY SOLUTIONS LTD. ("IDENTIFY")

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

As of December 31, 2004, the Company had invested $3.7 million in Identify, and had written off $3.1 million of its investment.  As of December 31, 2004, the Company holds a 3.2% equityinterest in Identify.

MODEM ART LTD. ("MODEM-ART")

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

As of December 31, 2004, the Company had invested $2.0 million in Modem-Art and had written off $1.0 million of its investment.  As of December 31, 2004, the Company holds a 2.2% equity interest in Modem-Art.  For a discussion on the sale of the investment in Modem Art please see "Significant Developments Since the Fiscal Year ended December 31, 2004 above.

NETFORMX, LTD. ("NETFORMX")

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

As of December 31, 2004, the Company had a 22.3% equity interest in Netformx, directly and indirectly through Ophir Holdings. As of December 31, 2004, the Company had invested $5.4 million and had written off $5.2 million of its investment in Netformx.

OPHIRTECH LTD. ("OPHIRTECH")

Ophirtech, the Company's 42.5%-owned affiliate, has invested in various companies in the high -technology sector.  Included among Ophirtech's investments are the following four companies:

CEREL CERAMIC TECHNOLOGIES LTD. ("CEREL")

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

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

As of December 31, 2004, Ophirtech had invested $0.9 million in Cerel for a 15.9% equity interest.

9

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EXPAND NETWORKS LTD. ("EXPAND")

Expand offers a complete framework for improving the performance of distributed enterprise applications. Expand's application, Traffic Management, combines four application-delivery technologies to improve application response times at remote branches.

As of December 31, 2004, Ophirtech had written off $1.3 million of its $3.2 million investment in Expand.  Ophirtech's equity interest in Expand is 9.3% as of December 31, 2004.

STOREAGE NETWORKING TECHNOLOGIES LTD. ("STOREAGE")

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

StoreAge offers worldwide sales, service and support, with principal offices in Irvine, CA and Nesher, Israel, and is privately held company spun-off from IIS, Intelligent Information Systems. As of December 31, 2004, Ophirtech had invested $3.0 million in StoreAge for a 10.9% equity interest.

VIOLA NETWORKS LTD. ("VIOLA")

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

As of December 31, 2004, Ophirtech had invested $3.4 million in Viola and had written off $1.9 million of its investment.  Ophirtech's equity interest in Viola is 5.8% as of December 31, 2004.

POWERDSINE LTD. ("POWERDSINE")

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

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

On June 10, 2004, PowerDsine completed its initial public offering on the NASDAQ (PDSN).  The Company sold part of its investment in PowerDsine during 2004 and recorded a gain of approximately $3.5 million.  As of Dec. 31, 2004, the Company holds 369,664 shares of PowerDsine (2.0%).

SHELLCASE LTD. ("SHELLCASE")

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

10

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As of December 31, 2004, the Company invested $6.4 million in ShellCase representing a 13.6% equity interest.  As of December 31, 2004, the Company had written off $6.2 million of its investment in ShellCase.

SHIRON SATELLITE COMMUNICATIONS (1996) LTD. ("SHIRON")

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

As of December 31, 2004, the Company had invested $2.1 million in Shiron and had made a $0.2 million loan to Shiron, and had written off $1.8 million of its investment in Shiron.  As of December 31, 2004, the Company's equity interest in Shiron is  7.1%.

SMART LINK LTD. ("SMART LINK")

Smart Link is a developer and supplier of software-based communications products that provide internet access and communication to the residential markets. Its proprietary technology enables customers to replace traditional hardware-based communications products with high-quality, user friendly software-based solutions that are less costly. Products include software and chips that are easily integrated into personal computers and information appliances. As of December 31, 2004, the Company had invested $2.9 million in Smart Link, constituting a 13.5% equity interest in Smart Link.

XPERT INTEGRATED SYSTEMS LTD. ("XPERT")

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

As of December 31, 2004, the Company had invested $2.75 million in Xpert and written off $1.8 million of its investment.  As of December 31, 2004, the Companys equity interest in Xpert was 12.7%.

Capital Markets And Other Holdings

AMPAL DEVELOPMENT (ISRAEL) LTD. ("AMPAL DEVELOPMENT")

Ampal Development, a wholly owned subsidiary of the Company, issued debentures which are publicly traded on the TASE. An aggregate of approximately $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.  An aggregate of approximately $2.0 million of these debentures were outstanding as of December 31, 2004.

CARMEL CONTAINERS SYSTEMS LIMITED ("CARMEL")

Carmel (KML) is one of the leading Israeli companies in designing, manufacturing and marketing carton boards and packaging products. Carmel and its subsidiaries manufacture a varied line of products, including corrugated shipping containers, moisture-resistant packaging, consumer packaging, triple-wall packaging and wooden pallets and boxes.  On November 30, 2004, Carmel filed an application with the Securities and Exchange Commission to withdraw its ordinary shares from listing on the AMEX and also filed to terminate registration of the shares under the Securities Exchange Act of 1934, as amended.  Ampal has objected to the delisting and deregistration of Carmel's ordinary shares, neither of which has been effectuated as of the date hereof. If Carmel is successful in this process, there will no longer be a public market for the ordinary shares held by Ampal.  The Company's equity interest
in Carmel is 21.75%.  As of December 31, 2004, the Company accounts for this investment pursuant to the equity method as $2.6 million (which includes impairment in an amount of $3 million).

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EPSILON INVESTMENT HOUSE LTD. ("EPSILON") AND RENAISSANCE INVESTMENT  COMPANY LTD. ("RENAISSANCE")

The Company had invested $1.5 million for 20% of Epsilon and its affiliate, Renaissance.  Epsilon is a financial services firm which provides portfolio management services and Renaissance provides underwriting services in Israel through its subsidiaries.

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, 2004, Ampal (Israel) Ltd. had 16 employees, Am-Hal Ltd. (a wholly owned subsidiary of Ampal) had 175 employees and Country Club Kfar Saba Ltd. (owned 51% by the Company) had 112 employees.

Relations between the Company and its employees are satisfactory.

CONDITIONS IN ISRAEL

Most of the companies in which Ampal directly or indirectly invests conduct their principal operations in Israel and are directly affected by the economic, political, military, social and demographic conditions there. A state of hostility, varying as to degree and intensity, exists between Israel and the Arab countries and the Palestinian Authority (the "PA").  Israel signed a peace agreement with Egypt in 1979 and with Jordan in 1994. Since 1993, several agreements have been signed between Israel and Palestinian representatives regarding conditions in the West Bank and Gaza.  While negotiations have taken place between Israel, its Arab neighbors and the PA to end the state of hostility in the region, it is not possible to predict the outcome of these negotiations and their eventual effect on Ampal and its investee companies.  Political developments in Israel notably the election of
Palestinian President Abu Mazen (a/k/a Mahmoud Abbas) and the improved relations between Israel and Palestine have had positive effects on the economic environment in Israel.  However, a return to the volatile security situation of the recent past may negatively impact the value of Ampal and its investee companies.  See "Economic and Financial Developments" below for further discussion of the possible impact of this situation on the Company.

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

Economic and Financial Developments

In 2004, unemployment in Israel averaged 10.4%. The rate of unemployment in 2003 averaged 10.7% as compared to 10.4% in 2002.  Management believes that the decrease resulted mainly from the improvement in the industrial and high tech sectors and the Israeli governments employment initiatives.

The change in consumer price index in 2004 was 1.2% compared to -1.9 % in 2003.

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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.  For 2004, Israeli companies were taxed on their income at a rate of 35%. 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%.

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

The tax reform legislation focused, inter alia, on a transition from a primarily territorial based tax system to a personal based tax system of Israeli tax residents (which mainly applies on the Company's Israeli subsidiaries). Consequently, Israeli tax residents are  taxed, as of January 1, 2003,  on their worldwide income;

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. 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%).

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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 2003, and has tax assessments from the Israeli Tax Authorities which are considered to be final through tax year 1999 (which final assessments are, under Israeli law, subject to reconsideration by the tax authorities only in certain limited circumstances, including fraud).  Based on the tax returns filed by Ampal through 2003, 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.

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

Since January 1, 1994, the portion of the gain attributable to inflationary differences prior to that date is taxable at a rate of 10%, while the portion of the gain attributable to inflationary differences between such date and the date of disposition of the assetisexempt 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. 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 2004  35%), whereas the portion of the gain attributed to the period after January 1, 2003 shall be taxed at the preferential rate of 25%.

Foreign corporations are generally exempt from tax on gains from the sale of shares in publicly traded companies.

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.

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Individuals and companies in Israel pay VAT at a rate of 17% 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.  Nir, a subsidiary of Ampal, is considered a Financial Institute under the VAT Law, and as such is subject to wage and profit tax rather than VAT.

United States 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%.

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.

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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.

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

ITEM 2. PROPERTY

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

Ampal currently leases an office at 555 Madison Avenue in New York City from Rodney Company N.V., Inc.  The lease period is seven years commencing on October 15, 2002. The annual rent for this lease is $117,920. On March 31, 2004, the Company closed this office.  The office space has been subleased.

Kfar Saba, which operates a country club in the town of Kfar Saba, occupies a 7-1/4 acre lot which will be leased for five consecutive ten-year periods, at the end of which the land returns to the lessor.  The lease expires on July 14, 2038, and lease payments in 2004 totaled $179,609.

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

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ITEM 3. LEGAL PROCEEDINGS

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 9,991,070 ($2.3 million).  Galha claimed that the Company,which was a shareholder of Paradise, and another shareholder of Paradise, misused funds that were received by Paradise from an insurance company for the purpose of reconstructing an industrial building owned by Galha and used by Paradise which burnt down.  Paradise is currently involved in liquidation proceedings.  Ampal issued a guarantee in favor of Galha for the payment of  an amount of up to NIS 4,000,000 ($928,500) 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.

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 shareholder;                                                                                                                                                                                           
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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)                                                                                                                                                                                                                                                                                                                                                                     
|   | (2)                                                                                                                                                                                                                                                                                                                                                                     
|   | (3)                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                         

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|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 claimin 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. | As of December 31, 2004, the Company had not received its dividend from MIRS in the amount of $7.1 million, included among "other assets", due March 31, 2004. The dividend was not received due to the legal dispute discussed above. As a result of not receiving the dividend, the principal and the interest of the loan which were due March 31, 2004 were only partially paid.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

The Annual Meeting of Shareholders was held on October 20, 2004. The following proposals were approved by the margins indicated below:



To elect eight (8) directors to the Board of Directors of the Company to hold office for one year terms and until their respective successors shall be elected and qualified:

|Names                 | For        | Withheld Authority
|--------------------- | ---------- | ------------------
|Yosef A. Maiman       | 12,110,198 | 287,611           
|Jack Bigio            | 12,110,198 | 287,611           
|Leo Malamud           | 12,373,486 | 24,323            
|Dr. Joseph Yerushalmi | 12,373,486 | 24,323            
|Michael Arnon         | 12,040,979 | 356,830           
|Yehuda Karni          | 12,373,486 | 24,323            
|Eitan Haber           | 12,373,486 | 24,323            
|Menahem Morag         | 12,373,486 | 24,323            
|                      |            |                   

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To ratify the nomination of Kesselman & Kesselman, a member firm of PricewaterhouseCoopers International Limited, as the independent auditors of the Company for the fiscal year ending December 31, 2004:

|For | Against    | Abstain
|--- | ---------- | -------
|    | 12,374,572 | 22,285 
|    |            |        



PART II

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

PRICE RANGE OF CLASS A STOCK

Ampal's Class A Stock is listed on Nasdaq 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 2004 and 2003, 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 
|-------------- | ---- | ----
|2004:          |      |     
|Fourth Quarter | 4.20 | 3.27
|Third Quarter  | 3.70 | 2.65
|Second Quarter | 3.87 | 2.81
|First Quarter  | 4.20 | 2.88
|2003:          |      |     
|Fourth Quarter | 4.05 | 2.80
|Third Quarter  | 3.20 | 2.50
|Second Quarter | 3.30 | 1.88
|First Quarter  | 2.59 | 1.89
|               |      |     
|               |      |     

As of February 25, 2005, there were approximately 763 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").

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DIVIDEND POLICY

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



Dividends on all classes of Ampal's shares of preferred stock are payable as a percentage of par value.  The holders of Ampal's presently authorized and issued 4% Preferred Stock and 6 1/2% Preferred Stock (each having a $5.00 par value) are entitled to receive cumulative dividends at the rates of 4% and 6 1/2% per annum, respectively, payable out of surplus or net earnings of Ampal before any dividends are paid on the Class A Stock.  If Ampal fails to pay such dividend to the preferred stockholders in any calendar year, such deficiency must be paid in full, without interest, before any dividends may be paid on the Class A Stock.  If, after the payment of all cumulative dividends on the preferred stock and a non-cumulative 4% dividend on the Class A Stock, there remains any surplus, any dividends declared are to be participated in by the holders of 4% Preferred Stock and Class A Stock,
pro rata.  On December 16, 2004, 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 31, 2004.

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,     | 2004 | 2003 | 2002 | 2001    | 2000
|---------------------------------- | ---- | ---- | ---- | ------- | ----
|
|
|
|
|Revenues                           |      |      | $    | 31,464  |     
|                                   |      |     
|Net income (loss) from continuing  |      |     
|operations                         |      |      | $    | (18,385 | )   
|Earnings (loss) per Class A share: |      |     
|Basic EPS                          |      |      | $    | (0.94   | )   
|Diluted EPS                        |      |      | $    | (0.94   | )   
|Total assets                       |      |      | $    | 304,947 |     
|                                   |      |     
|Notes and loans and debentures     |      |     
|Payable                            |      |      |      | 120,796 |     



|(1) | Computation is based on net income (loss) after deduction of preferred stock dividends of $200, $213, $218, $227 and $234, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

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ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

We seek to maximize shareholder value through acquiring and investing in companies that we consider have the potential for growth.  Our principal focus is on businesses located in the State of Israel or that are Israel-related.  In utilizing our core competencies and financial resources, our investment portfolio primarily focuses on a broad cross-section of Israeli companies engaged in various market segments including Industry, Real Estate, Telecommunications, Energy and High-Technology.

Ourinvestment 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.  Tofurther our strategic objectives and support our key business initiatives, we seek investments in companies that operate in Israel initially and then expand abroad. We are also monitoring investment opportunities, both in Israel and abroad, that we believe will strengthen and diversify our portfolio and maximize the value of our capital stock. In determining whether to acquire an interest in a specific company, we consider the quality of management, return on investment, growth potential, projected cash flow, investment size and financing, and reputable investment partners.  We also provide our investee companies with
ongoing support through our involvement in the investee companies' strategic decisions and introductions to the financial community, investment bankers and other potential investors both in and outside of Israel.

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

The results of investee companies which are greater than 50%-owned are by us 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, 2004, the accumulated effect on shareholders' equity was a decrease of approximately $20.1 million.  Upon disposition of an investment, the related cumulative translation adjustment balance will be
recognized in determining gains or losses.

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CRITICAL ACCOUNTING POLICIES

The preparation of Ampal's consolidated financial statements is in conformity with accounting principles generally accepted in the United States which requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. Actual results may differ from these estimates.  To facilitate the understanding of Ampal's business activities, described below are certain Ampal accounting policies that are relatively more important to the portrayal of its financial condition and results of operations and that require management's subjective judgments.  Ampal bases its judgments on its experience and various other assumptions that it believes to be reasonable under the circumstances.  Please refer to Note 1 to Ampal's consolidated financial statements included in this Annual Report for the
fiscal year ended December 31, 2004 for a summary of all of Ampal's significant accounting policies.

Portfolio Investments

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

Investment in MIRS

MIRS is our largest investment and is being accounted for at cost (our equity interest is 25%). The cost method is applied due to preference features we have been granted in our investment in preferred shares in MIRS.  Revenues from guaranteed payments from Motorola are recognized as income.  We perform annual tests for impairment regarding our investment in MIRS.  Our assessment, of our investment in MIRS as of December 31, 2004, resulted in an impairment charge of $30 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.

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

Accounting for Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate.  This process involves us estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes.  These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that recovery is not likely, we must establish a valuation allowance.  To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations.  A valuation allowance is currently set
against certain tax assets because management believes it is more likely than not that these deferred tax assets will not be realized through the generation of future taxable income.  We also do not provide for taxes on undistributed earnings of our foreign subsidiaries totaling $29.5 million in 2004, as it is our intention to reinvest undistributed earnings indefinitely outside the United States.  If the earnings were not considered permanently reinvested, approximately $10.3 million of deferred income taxes would have been provided as at December 31, 2004.

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

In December 2004, the FASB issued the revised SFAS No. 123, Share-Based Payment (SFAS 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.  This statement eliminates the ability to account for employee share-based payment transactions using APB Opinion No. 25 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 the first interim or annual reporting period that begins after June 15, 2005 (July 1, 2005 for the Company).  Early adoption of SFAS 123R is encouraged by the FASB. SFAS 123R 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 SFAS 123R.

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We estimate that the cumulative effect of adopting SFAS 123R as of its adoption date by the Company (July 1, 2005), based on the awards outstanding as of December 31, 2004, will be approximately $50,000.  This estimate does not include the impact of additional awards, which may be granted, or forfeitures, which may occur subsequent to December 31, 2004 and prior to our adoption of SFAS 123R. We expect that upon the adoption of SFAS 123R we will apply the modified prospective application transition method, as permitted by the statement.  Under such transition method, upon the adoption of SFAS 123R, Ampals financial statements for periods prior to the effective date of the statement will not be restated.  The impact of this statement on Ampals financial statements or its results of operations in 2006 and beyond will depend upon various factors, among them Ampals future
compensation strategy.  We expect that the effect of applying this statement on Ampals results of operations in 2005 as it relates to existing option plans would not be materially different from the SFAS 123 pro forma effect previously reported.  This statement will be effective as of the first interim period that begins after June 15, 2005 (July 1, 2005 for the Company).



In December 2004, the FASB
issued SFAS No. 153, Exchanges
of Non-Monetary Assets - An Amendment of APB Opinion No. 29 (SFAS 153).  SFAS
153 amends APB Opinion No. 29, Accounting for Non-Monetary Transactions.  The amendments made by SFAS 153 eliminate the APB Opinion No. 29 exception for non-monetary exchanges of similar productive assets and replace it with
a general exception for exchanges of non-monetary assets that do not have commercial substance.  The provisions in
SFAS 153 are effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005
(July 1, 2005 for the Company). Early application of the SFAS 153 is permitted.  The
provisions of this statement shall be
applied prospectively. We do not expect the adoption of SFAS 153 to have a material effect on the Companys financial statements or
its results of operations.

In March 2004, the FASB issued EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, which provides new guidance for assessing impairment losses on debt and equity investments. Additionally, EITF Issue No. 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF Issue No. 03-1; however, the disclosure requirements remain effective and have been adopted by the Company in these financial statements (see Note 2).  We will evaluate the effect, if any, of EITF Issue No. 03-1 when final guidance is released.

RESULTS OF OPERATIONS

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.

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).

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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 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.

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

SELECTED QUARTERLY FINANCIAL DATA

|                                     | First
Quarter | Second
Quarter | Third
Quarter | Fourth
Quarter | Total
|------------------------------------ | ------------- | -------------- | ------------- | -------------- | -----
|
|
|
|
|Fiscal Year Ended December 31, 2004  |               |                |               |                |      
|Revenues                             |               |                | $             | 7,469          |      
|Net interest expense                 |               |                |               | (715           | )    
|Net (loss) income                    |               |                |               | (811           | )    
|Basic EPS:                           |               |               
|Earnings (Loss) per Class A share(1) |               |                |               | (0.04          | )    
|Diluted EPS:                         |               |               
|Earnings (Loss) per Class A share    |               |                |               | (0.04          | )    
|                                     |               |                |               |                |      

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



|(1) | After deduction of dividends on the 4% and 6 1/2% Cumulative Convertible Preferred Stock in 2004 and 2003 of $200 and $213, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(2) | After allocation of net income to the participation of the 4% Cumulative Convertible Preferred Stock.
|--- | -----------------------------------------------------------------------------------------------------



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

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

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

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

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

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

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

On December 31, 2004, cash and cash equivalents were $17.6million, as compared with $4.6 million at December 31, 2003. The increase in cash and cash equivalents is primarily attributable to the net proceeds from trading securities.

The Company's sources of cash include cash, cash equivalents and marketable securities which amount to $68.1 million in 2004 as compared to $69.3 million in 2003. The Company also has sources of cash from operations, cash from investing activities and amounts available under credit facilities, as described below. The Company believes that these sources are sufficient to fund the current requirements of operations, capital expenditures, investing activities, dividends on preferred stock and other financial commitments of the Company for the next 12 months.  However, to the extent that contingencies and payment obligations described below and in other parts of this Report require the Company to make unanticipated payments, the Company would need to further utilize these sources of cash.  In the event of a decline in the market price of its marketable securities, the Company may need to draw
upon its other sources of cash, which may include additional borrowing, refinancing of its existing indebtedness or liquidating other assets, the value of which may also decline.  In addition, the shares of MIRS owned by the Company, 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 $13.1 million for the fiscal year ended December 31, 2004, as compared to approximately $12.4 million used in the same period in 2003.  The increase is primarily attributable to the $23.0 million net proceeds from trading securities ($59.8 million proceeds offset by $36.8 million invested) as compared to $15.0 million net investment in 2003, which was partially offset by (i) not receiving its dividend from MIRS in the amount of $7.1 million which was not received due to the legal dispute with the major partner, Motorola Communication Israel Ltd. (see Legal Proceedings) and (ii) the $3.3 million dividends received from affiliates as compared to $5.6 million in 2003.

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Cash flows from investing activities

Net cash provided by investing activities totaled approximately $17.7 million for the fiscal year ended December 31, 2004, as compared to approximately $16.5 million provided by for the same period in 2003.  The cash provided by investing activities is primarily attributable to an increase of deposits collected and proceeds from the disposition of XACCT, certain holdings of PowerDsine and certain assets of TP, which was partially offset by our initial investments in TP and other investee companies.

Cash flows from financing activities

The increase in the cash used in financing activities in 2004 is derived from the use of more of the Company's cash ($18.9 million in 2004 as compared to $1.3 million in 2003) in lieu of borrowing additional funds ($6.5 million in 2004 as compared to $19.9 million in 2003) to pay down it's existing notes payable and debentures ($25.4 million and $21.2 million in 2004 and 2003, respectively).

Investments

On December 31, 2004, the aggregate fair value of trading and available-for-sale securities was approximately $50.4 million, as compared to $64.7 million at December 31, 2003.  The decrease in 2004 is attributable to the sale of our interest in Granite and to the increase in market value of marketable securities.

In 2004, the Company made the following investments:

|1. | The company invested EUR 4.9 million (approximately US$5.8 million) in TP, a newly formed entity that will serve as a platform for investments in the telecommunication industry predominantly outside of Israel.  Ampal holds 33.3% of TP which currently holds investments in two European telecom service providers: PSINet Europe B.V. 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 additional investment of $0.3 million in Fimi Opportunity Fund, L.P. ("Fimi").
|-- | ---------------------------------------------------------------------------------



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



|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 Europe, one of the holdings of Ampal's investee company, TP, sold
all of its assets to certain 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
of TP is $1.2 million.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Debt

In connection with its investment
in MIRS, the Company has two long-term loans from Bank Hapoalim Ltd. ("Hapoalim") and Bank Leumi Le-Israel Ltd.
("Leumi") in the outstanding amount of $37.5 million and $33.5 million, respectively, as of December 31, 2004. Both loans are due on March 31, 2008 and bear interest at a rate of LIBOR plus 0.8%.  Other than as described in this paragraph, the loans are non-recourse to the Company and are secured by the Company's shares in MIRS. A total payment of 10% of the principal of the loans was due on March 31, 2004.  The remaining principal payments are due as follows:  15% on March 31, 2005 and 25% on each of the following dates - March 31, 2006, 2007 and 2008.  Interest is paid annually on March 31 of each year from March 31, 2001 until and including March 31, 2008.  As a result of not receiving the
dividend from MIRS in the amount of $7.1 million (see "Cash Flow from Operating Activity") the principal and the interest of the loan due March 31, 2004 were only partially paid.  As of the date hereof, the banks have not declared a default with respect to such unpaid amount.   These loans are subject to the compliance by MIRS with covenants regarding its operations and financial results.

As of December 31, 2004, the Company had $2.0 million in outstanding debentures with interest rates of 7.5%.  These debentures, which mature in 2005, are secured by $2.1 million in cash held in a secured account.

The Company financed a portion of the development of Am-Hal, a wholly-owned subsidiary which develops and operates luxury retirement centers for senior citizens, through bank loans from Hapoalim and others.  At December 31, 2004 and December 31, 2003, the amounts outstanding under these loans were $7.7 million and $9.2 million, respectively. The loans are dollar linked, mature in up to one year, and have interest rates of LIBOR plus 1.0%.  The Company generally repays these loans with the proceeds received from deposits and other payments from the apartments in Am-Hal facilities. The loans are secured by a lien on Am-Hal's properties. The Company also issued guarantees in the amount of $ 3.9 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 from Bank Hapoalim.  The long-term loans in the amount of $32.8 million mature through 2005-2011.

The weighted average interest rates and the balances of these short-term borrowings at December 31, 2004 and December 31, 2003 were 3.5% on $13 million and 3.6% on $27.5 million, respectively.

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



As of December 31, 2004, the Company had issued guarantees on certain outstanding loans to its investees and subsidiaries in the aggregate principal amount of $11.9 million. This includes:

|1. | $0.5 million guarantee to Bank Leumi with respect to the MIRS loan as described above.                                                                                                                                                                                                                                                                                                                                                                                                                | 
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|2. | $6.6 million guarantee on indebtedness incurred by Bay Heart ($3.3 million of which is recorded as a liability in the Company's financial statements at December 31, 2004) in connection with the development of its property. Bay Heart recorded losses in 2004 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. | 
|3. | $3.9 million guarantee to Am- Hal tenants as described above.                                                                                                                                                                                                                                                                                                                                                                                                                                         | 
|4. | $0.9 million guarantee to Galha 1960 Ltd. as described in Item 3 of this Report.                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 

In each of 2004 and 2003, 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. 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.

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As of  December 31, 2004, the Company had $10 million open forward exchange contract to purchase 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, 2004, and are sensitive to the above market risks.

During the fiscal year ended December 31, 2004, 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, 2003.

Interest Rate Risks

At December 31, 2004, the Company had financial assets totaling $20.9 million and financial liabilities totaling $120.8 million.  For fixed rate financial instruments, interest rate changes affect the fair market value but do not impact earnings or cash flows.  Conversely, for variable rate financial instruments, interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant.

At December 31, 2004, the Company had fixed rate financial assets of $20.9 million and had no variable rate financial assets.  A ten percent decrease in interest rates would increase the unrealized fair value of the fixed rate debt by approximately $0.1 million.

At December 31, 2004, the Company had fixed rate debt of $9.2 million and variable rate debt of $111.6 million.  A ten percent decrease in interest rates would decrease the unrealized fair value of the financial assets in the form of the fixed rate debt by approximately $0.1 million.

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



31

---

---



Exchange Rate Sensitivity Analysis

The Company's exchange rate exposure on its financial instruments results from its investments and ongoing operations in Israel.  During 2004, the Company entered into various foreign exchange forward purchase contracts to partially hedge this exposure.  At December 31, 2004, the Company had open foreign exchange forward purchase contracts in the amount of $10 million.  Holding other variables constant, if there were a ten percent devaluation of the foreign currency, the Company's cumulative translation loss reflected in the Company's accumulated other comprehensive loss would increase by $2 million, and regarding the statements of income loss a ten percent devaluation of the foreign currency would be reflected in a net decrease in earnings and would be $3.6 million.

Equity Price Risk

The Company's investments at December 31, 2004, included marketable securities which are recorded at fair value of $50.4 million, including a net unrealized gain of $4.9 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 $5 million.

32

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---



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, 2004 and 2003, 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, 2004.  These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.

We did not audit the financial
statements of certain subsidiaries, whose assets included in consolidation constitute
approximately 20.1% of total consolidated assets as of December 31, 2003, and whose
revenues included in consolidation constitute approximately 14.5% and 45.1% of total
consolidated revenues for the years ended December 31, 2003 and 2002, respectively. Also
we did not audit the financial statements of certain affiliated companies, the
companys interest in which as reflected in the balance sheets as of December 31,
2004 and 2003 is $13,345 thousands and $12,008 thousands, respectively, and the
Companys share in excess of profits over losses (share in excess of losses over
profits) in a net amount of $1,931 thousands, $676 thousands and ($825) thousands for the
years ended December 31, 2004, 2003 and 2002, 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 auditors.

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

In our opinion, based on our audits and the reports of other independent auditors, the financial statements referred to above present fairly, in all material respects, the financial position of the Company and its subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.



|Tel Aviv, Israel
|----------------
|March 10, 2005  

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

33

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---



AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)



|                                                           | Fiscal Year Ended December 31,
|---------------------------------------------------------- | ------------------------------
|
|
|
|
|REVENUES:                                                  |                               
|Equity in earnings (losses) of affiliates (Note 12)        |                               
|Real estate income                                         |                               
|Realized and unrealized gains  on                          |                               
|investments (Notes 2 and 4)                                |                               
|(Loss) gain on sale of real estate rental                  |                               
|property (Note 2 )                                         |                               
|Interest                                                   |                               
|Other (note 13)                                            |                               
|                                                           |                               
|Total revenues                                             |                               
|                                                           |                               
|EXPENSES:                                                  |                               
|Interest                                                   |                               
|Real estate expenses                                       |                               
|Realized and unrealized losses on                          |                               
|investments (Notes 2 and 4)                                |                               
|Loss from impairment of investments & real estate (Note 2) |                               
|Translation (gain) loss                                    |                               
|Other (mainly general and administrative)                  |                               
|                                                           |                               
|Total expenses                                             |                               
|                                                           |                               
|(Loss) Income before income taxes (tax benefits)           |                               
|Provision for income taxes (tax benefits) (Note 11)        |                               
|                                                           |                               
|                                                           |                               
|(Loss) Income after income taxes (tax benefits)            |                               
|Minority interests                                         |                               
|                                                           |                               
|                                                           |                               
|NET (LOSS) INCOME                                          |                               
|                                                           |                               
|                                                           |                               
|Basic EPS: (Note 10)                                       |                               
|(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.

34

---

---



AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                               | Assets As At
|-------------------------------------------------------------- | ------------
|
|
|
|
|Cash and cash equivalents                                      |             
|                                                               |             
|                                                               |             
|Deposits, notes and loans receivable (Note 3)                  |             
|                                                               |             
|Investments (Notes 2, 4 and 12):                               |             
|Marketable securities                                          |             
|Other investments                                              |             
|                                                               |             
|Total investments                                              |             
|                                                               |             
|Real estate property, less accumulated depreciation of $12,190 |             
|and $10,166                                                    |             
|                                                               |             
|                                                               |             
|Other assets (Note 5)                                          |             
|                                                               |             
|                                                               |             
|                                                               |             
|                                                               |             
|TOTAL ASSETS                                                   |             
|                                                               |             











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

35

---

---







AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS





|                                                                        | Liabilities and Shareholders'
Equity As At
|----------------------------------------------------------------------- | ------------------------------------------
|
|
|
|
|LIABILITIES                                                             |                                           
|                                                                        |                                           
|Notes and loans payable (Note 6)                                        |                                           
|Debentures                                                              |                                           
|Deposits from tenants                                                   |                                           
|Accounts payable, accrued expenses and others (Note 7)                  |                                           
|                                                                        |                                           
|Total liabilities                                                       |                                           
|                                                                        |                                           
|Commitments and Contingencies (note 16)                                 |                                           
|Minority interests                                                      |                                           
|                                                                        |                                           
|                                                                        |                                           
|                                                                        |                                           
|SHAREHOLDERS' EQUITY(Note 8)                                            |                                           
|                                                                        |                                           
|4% Cumulative Convertible Preferred Stock, $5 par value; authorized     |                                           
|189,287 shares; issued 124,024 and 131,952 shares; outstanding          |                                           
|120,674 and 128,602 Shares                                              |                                           
|                                                                        |                                           
|6-1/2% Cumulative Convertible Preferred Stock, $5 par value; authorized |                                           
|988,055 shares; issued 662,219 and 697,380 shares; outstanding 539,683  |                                           
|and 574,844 shares                                                      |                                           
|                                                                        |                                           
|Class A Stock $1 par value; authorized 60,000,000 shares; issued        |                                           
|25,715,303 and 25,567,210 shares; outstanding 19,883,639 and 19,735,546 |                                           
|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.

36

---

---



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 income (loss) to net       |                               
|cash provided by operating activities:                  |                               
|Equity in (earnings) losses of affiliates               |                               
|Realized and unrealized (gains) losses on               |                               
|investments                                             |                               
|Loss (gain) on sale of real estate rental property      |                               
|Depreciation expense                                    |                               
|Amortization (income) expense                           |                               
|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 (used in) investing activities     |                               
|                                                        |                               







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



37

---

---







AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                | Fiscal Year Ended December 31,
|--------------------------------------------------------------- | ------------------------------
|
|
|
|
|Cash flows from financing activities:                           |                               
|Notes and loans payable received                                |                               
|Notes and loans payable repaid                                  |                               
|Proceeds from exercise of stock options                         |                               
|Debentures repaid                                               |                               
|Contribution to partnership by minority interests               |                               
|Dividends paid on preferred stock                               |                               
|                                                                |                               
|Net cash used in financing activities                           |                               
|                                                                |                               
|Effect of exchange rate changes on cash and                     |                               
|cash equivalents                                                |                               
|                                                                |                               
|Net increase (decrease) in cash and cash equivalents            |                               
|Cash and cash equivalents at beginning of year                  |                               
|                                                                |                               
|                                                                |                               
|Cash and cash equivalents at end of year                        |                               
|                                                                |                               
|                                                                |                               
|Supplemental Disclosure of Cash Flow Information                |                               
|Cash paid during the year:                                      |                               
|Interest:                                                       |                               
|Others                                                          |                               
|                                                                |                               
|                                                                |                               
|Income taxes paid                                               |                               
|                                                                |                               
|                                                                |                               
|Proceeds in tradable securities received from realization of an |                               
|investment                                                      |                               
|                                                                |                               
|                                                                |                               
|Supplemental Disclosure of None cash Investing and              |                               
|Financing Activities:                                           |                               
|Investments in investees                                        |                               
|                                                                |                               





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



38

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---



AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY



|                                                 | Fiscal Year Ended December 31,
|------------------------------------------------ | ------------------------------
|
|
|
|
|4% PREFERRED STOCK                               |                               
|Balance, beginning of year                       |                               
|Conversion of 7,928, 7,439 and 6,835 shares      |                               
|into Class A Stock                               |                               
|                                                 |                               
|Balance, end of year                             |                               
|                                                 |                               
|                                                 |                               
|6-1/2% PREFERRED STOCK                           |                               
|Balance, beginning of year                       |                               
|Conversion of  35,161, 9,070 and 20,230 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                    |                               
|Exercise of stock options, including tax benefit |                               
|                                                 |                               
|Balance, end of year                             |                               
|                                                 |                               
|                                                 |                               
|RETAINED EARNINGS                                |                               
|Balance, beginning of year                       |                               
|                                                 |                               
|Net (loss) income                                |                               
|Dividends:                                       |                               
|4% Preferred Stock - $0.20 per share             |                               
|6-1/2% Preferred Stock - $0.325 per share        |                               
|                                                 |                               
|Balance, end of year                             |                               
|                                                 |                               







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

39

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---



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  6,160,664 shares, at cost            |                               
|                                                    |                               
|Issuance of 329,000 shares                          |                               
|                                                    |                               
|Balance, end of year - 5,831, 664, 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 marketable securities: |                               
|Balance, beginning of year                          |                               
|Unrealized (losses) gains, net                      |                               
|Sale of available-for-sale securities               |                               
|                                                    |                               
|Balance, end of year                                |                               
|                                                    |                               
|                                                    |                               
|Balance, end of year                                |                               
|                                                    |                               







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



40

---

---



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                 |                               
|                                                     |                               
|Other comprehensive income (loss)                    |                               
|                                                     |                               
|                                                     |                               
|Comprehensive (loss) income                          |                               
|                                                     |                               
|                                                     |                               
|Related tax (expense) benefit of other comprehensive |                               
|(loss) income:                                       |                               
|Foreign currency translation adjustments             |                               
|Unrealized gains on securities                       |                               











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



41

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AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 -- Summary of Significant Accounting Policies

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



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



|(2) | As used in these financial statements, the term the "Company" refers to Ampal-American Israel Corporation ("Ampal") and its consolidated subsidiaries. As to Segment information see note 15.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



The consolidated financial statements include the accounts of Ampal and its 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).

|(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 fairvalue,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, 2004, the open foreign exchange forward contracts totaled $ 10.0 million.



42

---

---



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



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

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

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

Marketable equity securities, other than equity securities accounted for by the equity method, are reported at fair value.  For those securities, which are classified as trading securities, realized and unrealized gains and losses are reported in the statements of income (loss).  Unrealized gains and losses from those securities, that are classified as available-for-sale, are reported as a separate component of shareholders' equity and are included in accumulated other comprehensive income (loss). Declines 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. The investment in MIRS communications Ltd. (MIRS) in preferred shares with preference features in the amount of $ 110 million, which exceeds 20% of ownership, is presented at cost. In December 2004, the Company recorded loss from impairment of its investment in MIRS of $ 30.0 million (see also note 2). At December 31, 2004 and 2003, the carrying value of all the cost basis investments was $ 89.4 million and $136.4 million, respectively.

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



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



43

---

---



|(h) | Income Taxes
|--- | ------------



The Company applies the liability method of accounting for income taxes, whereby deferred taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates, as of balance sheet date, to 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 (2003 - $43.6 million), since such earnings are currently expected to be permanently reinvested outside the United States.  If the earnings were not considered permanently invested, approximately $10.3 million (2003 - $15.3 million) of deferred income taxes would have been provided.

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

|(i) | Revenue Recognition
|--- | -------------------



Rental income is recorded over the rental period.  Revenues from services provided to tenants and country-club subscribers are recognized ratably over the contractual period or as services are performed.  Guaranteed payments from Motorola are recorded in the statement of income (loss) over the guaranteed period (see also note 14).  Revenue from amortization of tenant deposits is calculated at a fixed periodic rate based on the specific terms in the occupancy agreement signed with the tenants.

|(j) | Cash Equivalents
|--- | ----------------



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

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



Basic and diluted net earning (loss) per
share are presented in accordance with SFAS No. 128 "Earnings per share" ("SFAS No. 128"), 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 2004, and 2002 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 2,064,500 and 2,852,000 for the years ended
December 31, 2004 and 2002, respectively. As to data used in the per share computation see Note 10.



|(l) | Comprehensive Income
|--- | --------------------



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



44

---

---



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

The Company accounts for all employee stock options plans under APB Opinion No. 25, under which no compensation costs were incurred in the years ended December 31, 2004, 2003 and 2002.

SFAS No. 123 Accounting for Stock-Based Compensation (SFAS No. 123) 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 and restricted shares 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                      |  |                               
|                            |  |                               
|                            |  |                               
|                            |  |                               
|                            |  |                               
|                            |  |                               
|                            |  |                               
|                            |  |                               

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



(1)After deduction of accrued Preferred Stock Dividend of $200 and $213 and $218,

|respectively.
|-------------



45

---

---



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 2004, 2003 and 2002, respectively: (1) expected life of options of 5 years;  (2) dividend yield of 0%; (3) volatility ranging from 57% to 60%; and (4) risk-free interest rate ranging from 3.3% to 3.46%.

|(n) | Treasury stock
|--- | --------------



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



|(o) | Recently Issued Accounting Pronouncements                                          
For 123R (revised 2004) Share Base Payment
|--- | ------------------------------------------------------------------------------------------------------------------------------

In December 2004, the FASB issued the revised SFAS No. 123, Share-Based Payment (SFAS 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.  This statement eliminates the ability to account for employee share-based payment transactions using APB Opinion No. 25 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 the first interim or annual reporting period that begins after June 15, 2005 (July 1, 2005 for the Company).  Early adoption of SFAS 123R is encouraged by the FASB. SFAS 123R 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 SFAS 123R.



We estimate that the cumulative effect of adopting SFAS 123R as of its adoption date by the Company (July 1, 2005), based on the awards outstanding as of December 31, 2004, will be approximately $50,000.  This estimate does not include the impact of additional awards, which may be granted, or forfeitures, which may occur subsequent to December 31, 2004 and prior to our adoption of SFAS 123R. We expect that upon the adoption of SFAS 123R we will apply the modified prospective application transition method, as permitted by the statement.  Under such transition method, upon the adoption of SFAS 123R, Ampals financial statements for periods prior to the effective date of the statement will not be restated.  The impact of this statement on Ampals financial statements or its results of operations in 2006 and beyond will depend upon various factors, among them Ampals future
compensation strategy.  We expect that the effect of applying this statement on Ampals results of operations in 2005 as it relates to existing option plans would not be materially different from the SFAS 123 pro forma effect previously reported.  This statement will be effective beginning of the first interim period that begins after June 15, 2005 (July 1, 2005 for the Company).



FAS 153 Exchange of Nonmonetary Assets  Am Amendment of APB Opinion No. 29



In December 2004, the FASB
issued SFAS No. 153, Exchanges of Non-Monetary Assets  An Amendment of APB Opinion No. 29
(SFAS 153).  SFAS 153 amends APB Opinion No. 29, Accounting for Non-Monetary Transactions.
The amendments made by SFAS 153 eliminate the APB Opinion No. 29 exception for non-monetary exchanges of
similar productive assets and replace it with a general exception for exchanges of non-monetary assets that do not have
commercial substance.  The provisions in SFAS 153 are effective for non-monetary asset exchanges occurring in fiscal periods beginning after June
15, 2005 (July 1, 2005 for the Company). Early application of the SFAS 153 is permitted.  The provisions of this statement shall be
applied prospectively. We do not expect the adoption of SFAS 153 to have a material effect on the Company
s financial statements or its results of operations.



46

---

---



EITF Issue 03-1 "The Meaning of Other Than Temporary Impairment and Its Application to Certain Investment"



In March 2004, the FASB issued EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, which provides new guidance for assessing impairment losses on debt and equity investments. Additionally, EITF Issue No. 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF Issue No. 03-1; however, the disclosure requirements remain effective and have been adopted by the Company in these financial statements (see Note 2).  We will evaluate the effect, if any, of EITF Issue No. 03-1 when final guidance is released.



|(p) | Reclassifications
|--- | -----------------



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

Note 2  Acquisitions, Dispositions and Impairments

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



|(b) | 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.
|-- | ----------------------------------------------------------------------------------------



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



|(c) | 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)
|   |                                                             | 



47

---

---



|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 this time due to the current relationship with Motorola. See Note 16.



|(d) | 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 Satellite Communications (1996) Ltd., a developer and manufacturer of two-way satellite communications products.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------



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



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



|(e) | 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).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(f ) | 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).
|------------------------------------------------



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



|1. | An additional investment of $1.3 million in ShellCase Ltd.
|-- | ----------------------------------------------------------



|2. | An additional investment of $0.7 million in PowerDsine Ltd. (total equity interest of 8.1%), a leading developer of power supply devices for the telecommunications industry. (See also B(2) above).
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. | A loan to CUTe Ltd of $0.2 million (total equity interest of 20%), a developer of bandwidth efficient techniques for the delivery of digital media over wireless networks.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. | A loan to Camelot Information Technologies Ltd. of $0.5 million, a developer of security solution for organizations.
|-- | --------------------------------------------------------------------------------------------------------------------



|5. | An additional investment of $0.3 million in other investees.
|-- | ------------------------------------------------------------



48

---

---



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



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



| | 1.  | Bridgewave Communication Inc. ($ 2.8 million investment).              | 
| | --- | ---------------------------------------------------------------------- | 
| | 2.  | Shiron Satellite Communication (1996) Ltd. ($ 0.4 million investment). | 
| | 3.  | Enbaya Ltd. ($ 0.5 million investment).                                | 
| | 4.  | Modem Art Ltd. ($ 1.0 million investment).                             | 
| | 5.  | Oblicore Ltd. ($ 2.2 million investment).                              | 
| | 6.  | Star Management of Investment ($ 0.6 million investment).              | 
| | 7.  | VisionCare Ophthalmic Technologies Ltd. ($ 0.3 million investment).    | 
| | 8.  | ShellCase Ltd. ($ 2.3 million investment).                             | 
| | 9.  | Carmel Container Systems Limited ($ 0.9 million investment).           | 
| | 10. | Bay Heart Limited ($ 2 million investment and $ 0.9 million loan).     | 
| | 11. | Netformx Ltd. ($ 0.5 million loan).                                    | 
| | 12. | Camelot Information Technologies Ltd. ($ 0.5 million loan).            | 
| | 13. | $0.2 million in other investment.                                      | 
| |     |                                                                        | 



Note 3 -- Deposits, Notes and Loans Receivable

Deposits, notes and loans receivable earn interest at varying rates depending upon their linkage provisions.  Deposits mature in 2005. At December 31, 2004 and 2003, deposits, notes and loans receivable from related parties were $0.7 million for both years, and such balances with others were $2.8 million and $11.6 million, respectively. The allowance for doubtful notes receivable for 2004 and 2003 was none and $3.9 million, respectively.

Note 4 -- Investments in Marketable Securities

The Company classifies investments in marketable securities as trading securities or available-for-sale securities. Trading Securities

| | (a) | The cost and market values of Trading securities at December 31, 2004 and 2003 are as follows: | 
| | --- | ---------------------------------------------------------------------------------------------- | 
| |     |                                                                                                | 

|     | Cost | Unrealized
Gains | Market
Value
|---- | ---- | ---------------- | ------------
|
|
|
|
|2004 |      |                  | $           
|     |      |                  |             
|     |      |                 
|2003 |      |                  | $           
|     |      |                  |             



49

---

---



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

The cost and market values of available-for-sale securities at December 31, 2004 and 2003 are as follows:

|     | Cost | Unrealized
Gains (Losses) | Market
Value
|---- | ---- | ------------------------- | ------------
|
|
|
|
|2004 |      |                           | $           
|     |      |                           |             
|     |      |                          
|2003 |      |                           |             
|     |      |                           |             



Note 5  Other Assets

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

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



Note 6 -- Notes and Loans Payable

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

The Company has two long-term loans from Bank Hapoalim Ltd. ("Hapoalim") and Bank Leumi Le'Israel Ltd. ("Leumi") in the amount of $37.5 million and $33.5 million as of December 31, 2004, respectively, (in connection with its investment in shares of MIRS).  Both loans are due on March 31, 2008 and bear interest at a rate of LIBOR plus 0.8%. Other than as described below, the loans are non-recourse to the Company and are secured by the Company's shares in MIRS. Total payment of 10% of the principal of the loans was due on March 31, 2004. The remaining principal payments are due as follows:  15% on March 31, 2005 and 25% on each of the following dates: March 31, 2006, 2007 and 2008.  Interest is to be paid annually on March 31 of each year from March 31, 2001 until and including March 31, 2008.  As a result of not receiving the dividend from MIRS in the amount of $7.1 million, the principal
and the interest of the loan due March 31, 2004 were only partially paid. As of the date hereof, the banks have not declared a default with respect to such unpaid amount.  These loans are subject to the compliance by MIRS with covenants regarding its operations and financial results.



50

---

---



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

Other long term borrowings in the amount of $2.1 million mature through 2005-2009. The borrowings are linked to the Israeli C.P.I and bear an annual interest of 5.7%.

The weighted average interest rates on the balances of short-term borrowings at year-end are as follows:  3.5% on $13.0 million and 3.6% on $27.5 million in 2004 and 2003, respectively.



Note 7 -- Accounts payable accrued expenses and others

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

|                                        | As of December 31,
|--------------------------------------- | ------------------
|
|
|
|
|Deferred tax liabilities                |                   
|                                        |                   
|Deferred income and accrued expenses    |                   
|                                        |                   
|Excess of share and losses of affiliate |                   
|                                        |                   
|Others                                  |                   
|                                        |                   
|                                        |                   
|                                        |                   
|                                        |                   



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





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

The Companys liability for
severance pay pursuant to Israeli law is partly covered by insurance policies. The accrued severance pay liability of $ 0.7 million, net of deposits made to insurance policies of $ 0.3 million, is included in accounts payable, accrued expenses and other liabilities. During 2004 and 2003, the Company contributes for each year approximately $135,000 to cover insurance policies. The Company expects to
contribute a similar amount to the insurance policies in the fiscal year ending December 31, 2005.



Severance pay net increase (decrease) was approximately $21,000, $134,000 and $(84,000) in 2004, 2003, and 2002, 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 2014.

51

---

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Note 8 -- Shareholders' Equity

Capital Stock

The 4% and 6-1/2% preferred shares are convertible into 5 and 3 shares of Class A Stock, respectively.  At December 31, 2004, a total of 2,335,500 shares of Class A Stock are reserved for issuance upon the conversion of the Preferred Stock and the exercise of 2,064,500 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, 2004, there are no dividends in arrears.



Note 9 -- Stock Options



In March 1998, the Board approved a Long-Term Incentive Plan ("1998 Plan") permitting the granting of options to all employees, officers, directors and consultants of the Company and its subsidiaries to purchase up to an aggregate of 400,000 shares of Class A Stock. The 1998 plan was approved by the majority of the Company's shareholders at the June 19, 1998, annual meeting of shareholders. The plan remains in effect for a period of ten years. As of December 31, 2004, 70,000 options of the 1998 Plan are fully vested and outstanding.



On February 15, 2000, the Stock Option Committee approved a new Incentive Plan ("2000 Plan"), under which the Company has reserved 4 million shares of Class A Stock, permitting the granting of options to all employees, officers and directors. The 2000 Plan was approved by the Board of Directors of Ampal (the "Board") at the meeting held on March 27, 2000 and was approved by a majority of the Company's shareholders at the June 29, 2000 annual meeting of shareholders. The plan remains in effect for a period of ten years. As of December 31, 2004, 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 plants were granted either at market value or above.

Under each of the Plans, all granted but unvested options become immediately exercisable upon the occurrence of a change in control of the Company. On April 25, 2002, the controlling  shareholder of the Company, Rebar Financial Corp. sold all of its stock in the Company to Y.M. Noy Investments Ltd., accordingly,
the 329,000 outstanding options granted under the Plans were immediately exercisable.

52

---

---



As of December 31, 2004, 2,335,500 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, 2004
|---------------------------------------------- | -----------------------------------
|
|
|
|
|Outstanding at beginning of year               |                                    
|Granted at market price                        |                                    
|Forfeited/Expired                              |                                    
|                                               |                                    
|Outstanding at end of year                     |                                    
|                                               |                                    
|                                               |                                    
|Exercisable at end of year                     |                                    
|                                               |                                    
|                                               |                                    
|Weighted average fair value of options granted |                                    
|                                               |                                    
|                                               |                                    
|Weighted average remaining contractual life    |                                    
|                                               |                                    
|                                               |                                    
|                                               |                                    
|                                               |                                    
|
|
|
|
|
|Outstanding at beginning of year               |                                    
|Granted at market price                        |                                    
|Forfeited/Expired                              |                                    
|                                               |                                    
|Outstanding at end of year                     |                                    
|                                               |                                    
|                                               |                                    
|Exercisable at end of year                     |                                    
|                                               |                                    
|                                               |                                    
|Weighted average fair value of options granted |                                    
|                                               |                                    
|                                               |                                    
|Weighted average remaining contractual life    |                                    
|                                               |                                    

53

---

---



|                                               | Fiscal Year EndedDecember 31, 2002
|---------------------------------------------- | ----------------------------------
|
|
|
|
|Outstanding at beginning of year               |                                   
|Granted at market price                        |                                   
|Exercised                                      |                                   
|Forfeited/Expired                              |                                   
|                                               |                                   
|Outstanding at end of year                     |                                   
|                                               |                                   
|Exercisable at end of year                     |                                   
|                                               |                                   
|Weighted average fair value of options granted |                                   
|                                               |                                   
|                                               |                                   
|Weighted average remaining contractual life    |                                   
|                                               |                                   



Note 10  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, 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 |                                    
|                                         |                                    

54

---

---



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

|(1) | After deduction of Preferred Stock dividends of  $200, $213 and $218 in 2004, 2003 and 2002, respectively.
|--- | ----------------------------------------------------------------------------------------------------------

|(2) | Options to purchase 2,064,500 and 2,852,000 shares of common stock were outstanding as of December 31, 2004 and 2002, 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.                                                                                                                                         
|(4) | Restated, in order to reflect the implementation of the two-class method instead of the if converted method implemented in the past.                                                                                                   
|    |                                                                                                                                                                                                                                        

Note 11 -- 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 income (below) U.S. rate,        |                               
|net of tax credits                                |                               
|                                                  |                               
|Changes in valuation allowance                    |                               
|                                                  |                               
|Other                                             |                               
|                                                  |                               
|Total effective tax: 31%, 4%,and 4%               |                               
|                                                  |                               

55

---

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|                                                             | 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              |                   
|Unrealized gains (losses) on trading securities              |                   
|Other                                                        |                   
|                                                             |                   
|Total deferred tax liability                                 |                   
|                                                             |                   
|Net deferred tax assets (liability)                          |                   
|                                                             |                   



As of December 31, 2004, valuation allowance is provided against tax benefits on foreign net operating loss carryforwards of $11.3 million and of loss from impairment of investment of $0.9 million.

As of December 31, 2003, valuation allowance is provided against tax benefits on foreign net operating loss carryforwards of $6.0 million, realized and unrealized loss of investment in securities of $4.8 million and of loss from impairment of investment of $7.1 million.

As of December 31, 2004, the Company has foreign tax credits of $5.5 million that will expire in the years 2009 through 2014.

As of December 31, 2004, the Company has U.S. Federal capital loss carryforwards of $6.1 million that will expire in 2008 and 2009 and net operating loss carryforwards of approximately $31.7 million that will expire in the years 2020 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 12 -- Investments in Affiliates

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

|                                         | As of December 31,
|---------------------------------------- | ------------------
|
|
|
|
|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.              |                   

56

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

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

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

The carrying value of the Company's investment in shares of Carmel Containers at December 31, 2004, amounted to $2.6 million.On November 30, 2004, Carmel filed an application with the Securities and Exchange Commission to withdraw its ordinary shares from listing on the AMEX and also filed to terminate registration of the shares under the Securities Exchange Act of 1934, as amended.  Ampal has objected to the delisting and deregistration of Carmel's ordinary shares, neither of which has been effectuated as of the date hereof. If Carmel is successful in this process, there will no longer be a public market for the ordinary shares held by Ampal.



Note 13  Other Income.

Other revenues for each of the years ended December 31, 2004, 2003 and 2002 include accrual of guaranteed payments from Motorola relating to the investment in MIRS of $ 7.1 million.

Note 14 -- Segment Information

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

57

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



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

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

58

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

Note 15 -- Disclosures about Fair Value of Financial Instruments

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

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

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

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

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

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

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

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

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

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

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

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

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

|                                     | 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 16-- Commitments and Contingencies

(a)The combined minimum annual lease payments on Ampal's and its subsidiaries in 2004 were $ 0.3 million.  In the years 2005-2009, the combined annual lease payments on those premises, will be in an aggregate amount of $ 1.5 million, and thereafter, an amount totaling $5.6 million. The lease of the corporate offices expires in 2009 and the Kfar Saba lease expires in 2037.

(b)AM-Hal provided a lien to Bank Hapoalim on AM- Hal properties in Rishon  Le Zion and Hod Hasharon to guarantee a loan of $7.7 million.

(c)The Company has issued guarantees on bank loans to its investees and subsidiaries totaling $11.9 million as follows:

|(1) | The Company provided a $3.9 million guarantee to AM  Hal  tenants.                  | 
|--- | ------------------------------------------------------------------------------------ | 
|(2) | The Company provided a $6.6 million guarantee on indebtedness incurred by Bay Heart.

|    | (3)                                                                          | The Company provided a $0.5 million guarantee to Leumi with respect to the MIRS loan beginning in 2006 with respect to the Company's repayment obligation under the loan.                   
|--- | ---------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | (4)                                                                          | The Company provided a $0.9 million guarantee to Galha (1960) Ltd, for the payment of the Company's subsidiary of a final judgment, if entered against the Company's subsidiary. (See below)
|(d) | The Company made a commitment to invest $2.8 million in Star II (2000 L.P.). |                                                                                                                                                                                             
|(e) | Legal Proceedings:                                                           |                                                                                                                                                                                             
|    |                                                                              |                                                                                                                                                                                             

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 9,991,070 ($2.3 million).  Galha claimed that the Company,which was a shareholder of Paradise, and another shareholder of Paradise, misused funds that were received by Paradise from an insurance company for the purpose of reconstructing an industrial building owned by Galha and used by Paradise which burnt down.  Paradise is currently involved in liquidation proceedings.  Ampal issued a guarantee in favor of Galha for the payment of  an amount of up to NIS 4,000,000 ($928,500) 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.





60

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

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)                                                                                                                                                                                                                                                                                                                                                                     
|   | (2)                                                                                                                                                                                                                                                                                                                                                                     
|   | (3)                                                                                                                                                                                                                                                                                                                                                                     
|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.                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                         



On May 24, 2004 and on May 31, 2004 the Defendants requested the district court to strike out the claimin 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.

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As of December 31, 2004, the Company had not received its dividend from MIRS in the amount of $7.1 million, included among "other assets", due March 31, 2004. The dividend was not received due to the legal disputediscussed above. As aresult of not receiving the dividend, the principal and the interest of the loan which were due March 31, 2004 were only partially paid.



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

Note 17  Subsequent Events

In 2005, the Company sold all of its remaining interest in Industrial Buildings Company for $15.5 million ($6.9 million directly and $8.6 million indirectly through Ophir Holdings Ltd.). The
Companys share in the net gain is approximately $3.9 million.

In March 2005, the Company sold all of its holdings in Modem Art Ltd. for approximately $5 million.  The Company recorded a gain of approximately $4 million.



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



Please see Item 11 below for a description of an Indemnification and Compensation agreement between the Company and each of Messrs. Karni, Haber and Morag.



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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 February 25, 2005:

|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)  | Director                                          
|Eitan Haber (2) (3)       | Director                                          
|Menahem Morag (2) (3)     | Director                                          
|Irit Eluz                 | CFO, Senior Vice President - Finance and Treasurer
|Shlomo Shalev             | Senior Vice President - Investments               
|Yoram Firon               | Vice President-Investments and Corporate Affairs  
|                          | and Secretary                                     
|Amit Mansur               | 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.
|--- | -------------------------------------------------------------------





In 2004, the Board met three times and acted six times by written consent; the Executive Committee met one time and did not act by written consent; the Audit Committee met seven times and did not act by written consent. The Stock Option and Compensation Committee met one time 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 2004 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 2004 (during the period of such service).  Each director of the Board is elected for a one year term and serves until his or her successor is duly elected and qualified.

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

YOSEF A. MAIMAN, 59, 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.

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JACK BIGIO, 39 has been the President and Chief Executive Officer of Ampal since April 25, 2002, and a director of Ampal since March 6, 2002.  From 1998 until April 2002, Mr. Bigio held
various officer positions at Merhav, most recently as the Senior Vice President - Operations and Finance.  Mr. Bigio is also a director of Eltek.

LEO MALAMUD, 53, has been a director of Ampal since March 6, 2002.  Since 1996, Mr. Malamud was the Senior Vice President of Merhav.  Mr. Malamud is also a director of Eltek.

Dr. JOSEPH YERUSHALMI, 67, 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, 76, 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, 65, was the Head of Bureau for the former Prime Minister of Israel, Yitzhak Rabin, from July 1993 until November 1995.  Since 1996, Mr. Haber has been the President and Chief Executive Officer of Geopol Ltd., which represents the Korean conglomerate Samsung in Israel and the Middle East; Kavim Ltd., a production and project development company; and Adar Real Estate Ltd., a real estate company.  Mr. Haber is also a member of various non-profit organizations.  He has been a director of Ampal since August 16, 2002.

MENAHEM MORAG, 54, 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.

IRIT ELUZ, 38, 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.

SHLOMO SHALEV, 43, has been Senior Vice President - Investments since May 2002.  From August 1997 through April 2002, Mr. Shalev was Vice President in Ampal Industries (Israel) Ltd, a wholly owned subsidiary of the Company.  From August 1994 through July 1997, Mr. Shalev was the Israeli Consul for Economic Affairs in the northwest region of the Unites States.

YORAM  FIRON, 36, has been Secretary and Vice President - Investments and Corporate Affairs since May 2002.  During the preceding five years, Mr. Firon was a Vice President of Merhav and a partner in the law firm of Firon Karni Sarov & Firon.

AMIT MANSUR, 35, has been Vice President  Investments since March 2003. From September 2000 through December 2002, Mr. Mansur served at Alrov Group as Strategy & Business Development Manager.  From February 1997 through September 2000, Mr. Mansur was a projects manager at the Financial Advisory Services of KPMG Somekh Chaikin.

64

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GIORA BAR-NIR, 48, 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.  On October 31, 2004, Michael Arnon, a member of the Audit Committe, passed away.

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.

65

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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, 2004, 2003 and 2002.

|                          |  |  |      | Annual Compensation | 
|------------------------- |  |  | ---- | ------------------- | 
|
|
|
|
|Yosef A. Maiman(1)(12)    |  |  | 2004 |                     | 
|Chairman of the Board     |  |  | 2003 |                     | 
|                          |  |  | 2002 |                     | 
|Jack Bigio(2) (12)        |  |  | 2004 |                     | 
|President and CEO         |  |  | 2003 |                     | 
|                          |  |  | 2002 |                     | 
|Irit Eluz (3(12)          |  |  | 2004 |                     | 
|CFO - SVP Finance &       |  |  | 2003 |                     | 
|Treasurer                 |  |  | 2002 |                     | 
|Shlomo Shalev (6)         |  |  | 2004 |                     | 
|Senior Vice President -   |  |  | 2003 |                     | 
|investment                |  |  | 2002 |                     | 
|                          |  |  |      |                     | 
|Yoram Firon (8)(12)       |  |  | 2004 |                     | 
|Secretary, Vice-President |  |  | 2003 |                     | 
|& Corporate Affairs       |  |  | 2002 |                     | 
|Dafna Sharir (4)          |  |  | 2004 |                     | 
|Senior Vice President     |  |  | 2003 |                     | 
|Investments               |  |  | 2002 |                     | 

---

|(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 Aprl 25, 2002.                                                                                                                                                                       
|     |                                                                                                                                                                                                                                
|(4)  | Ms. Sharir served as Senior Vice President Investments from April 25, 2002 until November 30, 2004.                                                                                                                            
|     |                                                                                                                                                                                                                                
|(5)  | Mrs. Sharir retired on November 30, 2004, the amount includes final account settlement.                                                                                                                                        
|     |                                                                                                                                                                                                                                
|(6)  | Mr. Shalev was appointed Senior Vice President of Investment since May 21, 2002.                                                                                                                                               
|     |                                                                                                                                                                                                                                
|(7)  | On November 30, 2004, Ms. Sharir agreed to immediately terminate all of her options to purchase shares of Class A Stock of the Company pursuant to an option cancellation agreement entered into by the Company and Ms. Sharir.
|     |                                                                                                                                                                                                                                
|(8)  | Mr. Firon has been employed by Ampal since April 25, 2002.                                                                                                                                                                     
|     |                                                                                                                                                                                                                                
|(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.                                                                                                                   

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|     |                                                                                                                                                                                                                                                               
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 changeof 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.





Fiscal Year-End Option Values



|                | Number of Securities Underlying
Unexercised Options at Fiscal Year End 2004 | Unrealized Value of
In-the-Money Options
|--------------- | --------------------------------------------------------------------------- | ----------------------------------------
|
|
|
|
|Yosef A. Maiman |                                                                             |                                         
|Jack Bigio      |                                                                             |                                         
|Irit Eluz       |                                                                             |                                         
|Shlomo Shalev   |                                                                             |                                         
|Yoram Firon     |                                                                             |                                         

Option Grants In Last Fiscal Year

The following table sets forth certain information regarding stock options granted to purchase our Class A Stock to our named executive officers during fiscal year 2004:

|Name          | OptionPlan | Number ofSecuritiesUnderlyingOptionGranted | % ofTotalOptionsGranted toEmployees inFiscal Year | ExercisePricePer Share | MarketPrice onDate ofGrant | ExpirationDate | Potential Realizable Valueat Assumed Annual Rates ofStock Price Appreciation for
Option Term
|------------- | ---------- | ------------------------------------------ | ------------------------------------------------- | ---------------------- | -------------------------- | -------------- | --------------------------------------------------------------------------------------------
|
|
|
|
|Jack Bigio    |            |                                            | 2000                                              |                        |                            |                | 280,000                                                                                     
|Irit Eluz     |            |                                            | 2000                                              |                        |                            |                | 280,000                                                                                     
|Shlomo Shalev |            |                                            | 2000                                              |                        |                            |                | 30,000                                                                                      
|Yoram Firon   |            |                                            | 2000                                              |                        |                            |                | 190,000                                                                                     

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.

67

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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 Secial 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.

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 2004, 2003 and 2002.

|                     | 2004 | 2003 | 2002
|-------------------- | ---- | ---- | ----
|
|
|
|
|Yosef A. Maiman (1)  |      |      |     
|Jack Bigio (3)       |      |      |     
|Leo Malamud (3)      |      |      |     
|Yossi Yerushalmi (2) |      |      |     
|Eitan Haber (2)      |      |      |     
|Yehuda Karni (2)     |      |      |     
|Menahem Morag (4)    |      |      |     
|Michael Arnon (5)    |      |      |     

(1) Since April 25, 2002.

(2) Since  August 16, 2002.

(3) Since March 6, 2002.

(4) Since March 24, 2004.

(5) Mr. Arnon passed away onOctober 31, 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, 2004, 70,000 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, 2004, 2,064,500 options of the 2000 Plan are outstanding.

68

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The options granted under the 1998 Plan and the 2000 Plan (collectively, the "Plans") may be either incentive stock options, at an exercise price to be determined by the Stock Option and Compensation Committee ("the Committee") but not less than 100% of the fair market value of the underlying options on the date of grant, or non-incentive stock options, at an exercise price to be determined by the Committee. The Committee may also grant, at its discretion, "restricted stock," "dividend equivalent awards," which entitle the recipient to receive dividends in the form of Class A Stock, cash or a combination of both and "stock appreciation rights," which permit the recipient to receive an amount in the form of Class A Stock, cash or a combination of both, equal to the number of shares of Class A Stock with respect to which the rights are exercised multiplied by the excess of the fair market
value of the Class A Stock on the exercise date over the exercise price.  The options granted under the Plans were granted either at market value or above.

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

The Company accounts for all plans under APB Opinion No. 25, under which no compensation costs were incurred in the years ended December 31, 2002, 2003 and 2004.  If compensation cost for the options under the above Plans had been determined in accordance with
SFAS No. 123, the Company's net income (loss) and EPS would have been $(51,755) million, $ 8,138 million and $(19,154) million, 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. Menachem Morag, none of whom is an officer or employee or former officer or employee of the Company.  During 2004, 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.  Prior to October 31, 2004, Mr. Michael Arnon served as a member of the Stock Option and Compensation Committee.  Mr. Arnon previously served as Chairman of the Board of Directors of the Company from November 1990 until July 1994 and President and Chief Executive Officer of the Company from July 1986 until November 1990).

69

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND                         MANAGEMENT

|                                                           | Equity Compensation Plan Information(1)                                                   
|---------------------------------------------------------- | ------------------------------------------------------------------------------------------
|Plan category                                              | Number of securitiesto be issuedupon exercise ofoutstanding options,warrants and rights(a)
|Equity compensationplans approved bysecurity holders . . . | 2,064,500                                                                                 
|Equity compensationplans not approvedby security holders . | N/A                                                                                       
|Total                                                      | 2,064,500                                                                                 



(1) All information provided as of December 31, 2004.



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PRINCIPAL SHAREHOLDERS OF AMPAL

The following table sets forth information as of February 25, 2005, 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 February 25, 2005, there were 19,942,996 (not including treasury shares) shares of Class A Stock of Ampal outstanding.  In addition, as of
February 25, 2005, there were 520,883 non-voting shares of 6 1/2% Preferred Stock outstanding (each convertible into 3 shares of Class A Stock outstanding and 120,079non-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                               |                |                                                    
|Yosef A. Maiman                      |                |                                                     |                                               
|Y.M. Noy Investments Ltd., of 33     |                |                                                    
|Havazelet Hasharon St., Herzliya,    |                |                                                    
|Israel                               |                |                                                    
|Ohad Maiman                          |                |                                                     |                                               
|Y.M. Noy Investments Ltd., of 33     |                |                                                    
|Havazelet Hasharon St., Herzliya,    |                |                                                    
|Israel                               |                |                                                    
|Noa Maiman                           |                |                                                     |                                               
|Y.M. Noy Investments Ltd., of 33     |                |                                                    
|Havazelet Hasharon St., Herzliya,    |                |                                                    
|Israel                               |                |                                                    

---



|(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 156,250 shares of Class A Stock underlying options which are currently exercisable by Mr. Maiman.                                                                                                                                                                                                                                                                                                                                                

71

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Security Ownership of Management

The following table sets forth information as of February  25, 2005 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                           |                                                                      |                                               
|Shlomo Shalev                        |                                                                      |                                               
|Irit Eluz                            |                                                                      |                                               
|Yoram Firon                          |                                                                      |                                               
|Leo Malamud                          |                                                                      |                                               
|Dr. Josef 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 156,250 shares underlying options for Yosef Maiman which are presently exercisable.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Audit Committee of Ampal has the duty and responsibility of approving all transactions between Ampal, on the one hand, and any officer, director, or affiliate thereof, on the other hand, or in which any officer, director or affiliate has a material interest. 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.



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, 2004 and December 31, 2003 and reviewing the financial statements included in the Companys quarterly reports on Form 10-Q were $267,000 and $223,000, respectively.

TAX FEES.  Kesselman's tax fees for the fiscal years ended December 31, 2004 and December 31, 2003, were $100,000 and  $103,600 respectively.

72

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ALL OTHER FEES - Kesselman's fees for other services for the fiscal years ended December 31, 2004 and December 31, 2003, were $42,800 and $49,200 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.

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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 Auditors                                                                                                           |               
|Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002                                                   |               
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                                                             |               
|Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002                                               |               
|Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2004, 2003 and 2002                          |               
|Consolidated Statements of Comprehensive Income for the years ended December 31, 2004, 2003 and 2002                                     |               
|Notes to Consolidated Financial Statements                                                                                               |               
|Supplementary Data:                                                                                                                      |               
|Selected quarterly financial data for the years ended December 31, 2004 and 2003                                                         |               
|(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, 2004
|                                                                                                                                         |                |                                                             | 

Representative Rates of Exchange 
Between the U.S. Dollar and the New Israeli Shekel
For the Three Years Ended December 31, 2004

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

|             | 2004  | 2003  | 2002 
|------------ | ----- | ----- | -----
|March 31     | 4.528 | 4.687 | 4.668
|June 30      | 4.497 | 4.312 | 4.769
|September 30 | 4.482 | 4.441 | 4.871
|December 31  | 4.308 | 4.379 | 4.737

74

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| | (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, 2004 and 2003
| | ------------------------------------------------------------

| | Consolidated
Statements of Income for the years ended December 31, 2004,               2003 and 2002
| | ----------------------------------------------------------------------------------------------------

| | Consolidated
Statements of Changes in Shareholders' Equity for the years               ended December
31, 2004, 2003 and 2002
| | -----------------------------------------------------------------------------------------------------------------------------

| | Consolidated
Statements of Cash Flows for the years ended December 31,               2004, 2003 and
2002
| | --------------------------------------------------------------------------------------------------------

| | Notes
to Financial Statements
| | -----------------------------

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

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

75

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

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

| | 10k. | Stock
Option Cancellation Agreement, dated as of November 30, 2004, between
               Ampal-American Israel Corporation and Dafna Sharir.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------

77

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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  | AM-HAL Ltd.                                       | E-23.1 
|23.2  | Ampal-American Israel Corporation                 | E-23.2 
|23.3  | Bay Heart, Ltd.                                   | E-23.3 
|23.4  | Carmel Container Systems Ltd.                     | E-23.4 
|23.5  | Coral World International Ltd.                    | E-23.5 
|23.6  | Country Club Kfar Saba Limited                    | E-23.6 
|23.7  | Epsilon Investment House Ltd.                     | E-23.7 
|23.8  | Granite Hacarmel Investment Limited               | E-23.8 
|23.9  | Hod Hasharon Sport Center Ltd.                    | E-23.9 
|23.10 | Hod Hasharon Sport Center (1992) Ltd. Partnership | E-23.10
|23.11 | Ophir Holdings Ltd.                               | E-23.11
|23.12 | Renaissance Investment Co. Ltd.                   | E-23.12
|23.13 | Shmey-Bar Real Estate 1993 Ltd.                   | E-23.13
|23.14 | Shmey-Bar (T.H.) 1993 Ltd.                        | E-23.14
|23.15 | Shmey-Bar (I.A.) 1993 Ltd.                        | E-23.15
|23.16 | Trinet Investment in High-Tech Ltd.               | E-23.16

78

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

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

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

* Management contract, compensatory
plan or arrangement.

79

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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-

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---

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-

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---

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) 2004 ANNUAL REPORT



---

---



OPHIR HOLDINGS LTD.
2004 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                 | 9-35



---

---



# 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, 2004 and
2003 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, 2004. 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) and
with the auditing standards generally accepted in Israel, including those prescribed by
the Israeli Auditor (Mode of performance) Regulations, 1973. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits 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, 2004 and 2003 and the
consolidated results of operations, changes in shareholders equity and cash flows of
the Company for each of the three years in the period ended December 31, 2004, 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 14 to the consolidated financial
statements.

|Tel-Aviv, Israel
   March 6, 2005 |  | Kesselman & Kesselman
Certified Public Accountants (Isr.)
|--------------------------------- |  | ---------------------------------------------------------

2

---

---



OPHIR HOLDINGS LTD.
CONSOLIDATED BALANCE SHEETS

|                            |  | December 31
|--------------------------- |  | -----------
|
|
|
|
|A s s e t s                 |  |            
|CURRENT ASSETS :            |  |            
|Cash and cash equivalents   |  |            
|Marketable securities       |  |            
|Accounts receivable         |  |            
|                            |  |            
|T o t a l    current assets |  |            
|                            |  |            
|LAND - BUSINESS INVENTORY   |  |            
|                            |  |            
|INVESTMENTS:                |  |            
|Associated companies        |  |            
|Other companies             |  |            
|Loan to related party       |  |            
|                            |  |            
|                            |  |            
|                            |  |            
|FIXED ASSETS,net of         |  |            
|accumulated depreciation    |  |            
|                            |  |            
|                            |  |            
|                            |  |            

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

Date
of approval of the financial statements: March 6, 2005.

3

---

---



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

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

4

---

---



OPHIR HOLDINGS LTD. 
CONSOLIDATED STATEMENTS OF INCOME (LOSSES)

|                                                              | Note | 2004 | 2003    | 2002
|------------------------------------------------------------- | ---- | ---- | ------- | ----
|
|
|
|
|REVENUES AND GAINS:                                           |      |      |         |     
|From lease of buildings                                       |      |      |         |     
|Share in profits (losses) of associated companies - net       |      |      | 3       |     
|Gain (loss) from sale of real estate, net                     |      |      |         |     
|Gain from sale and increase in value of marketable securities |      |      |         |     
|Gain from sale of land-business inventory                     |      |      |         |     
|Dividend received from other companies                        |      |      |         |     
|Management fees from associated companies and others          |      |      | 11a     |     
|                                                              |      |      |         |     
|                                                              |      |      |         |     
|                                                              |      |      |         |     
|EXPENSES AND LOSSES:                                          |      |     
|Operating cost of leased buildings (including depreciation)   |      |      |         |     
|Impairment of investments in associated companies             |      |     
|and other companies                                           |      |      | 3, 4    |     
|General and administrative expenses - net                     |      |      | 11a     |     
|Financial expenses - net                                      |      |      | 11a;13f |     
|                                                              |      |      |         |     
|                                                              |      |      |         |     
|                                                              |      |      |         |     
|INCOME (LOSS) BEFORE TAXES ON INCOME                          |      |      |         |     
|TAXES ON INCOME (TAX SAVING)                                  |      |      | 10      |     
|                                                              |      |      |         |     
|INCOME (LOSS) AFTER TAXES ON INCOME                           |      |     
|(TAX SAVING)                                                  |      |      |         |     
|MINORITY INTEREST IN LOSSES (PROFITS) OF A                    |      |     
|SUBSIDIARY                                                    |      |      |         |     
|                                                              |      |      |         |     
|NET INCOME (LOSS) FOR THE YEAR                                |      |      |         |     
|                                                              |      |      |         |     

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

5

---

---



OPHIR HOLDINGS LTD. 
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

|                                           | Share
capital | Capital
surplus | Dividend
Declared
Subsequent to
balance sheet
date | Retained
earnings | Total
|------------------------------------------ | ------------- | --------------- | -------------------------------------------------- | ----------------- | -----
|
|
|
|
|BALANCE AT JANUARY 1, 2002                 |               |                 |                                                    | 2,832             |      
|CHANGES DURING 2002 -                      |               |                
|loss                                       |               |                 |                                                    |                   |      
|                                           |               |                 |                                                    |                   |      
|BALANCE AT DECEMBER 31, 2002               |               |                 |                                                    | 2,832             |      
|CHANGES DURING 2003:                       |               |                
|Net income                                 |               |                 |                                                    |                   |      
|Dividend paid                              |               |                 |                                                    |                   |      
|Erosion of capital note                    |               |                 |                                                    |                   |      
|                                           |               |                 |                                                    |                   |      
|BALANCE AT DECEMBER 31, 2003               |               |                 |                                                    | 2,832             |      
|CHANGES DURING 2004:                       |               |                
|Net income                                 |               |                 |                                                    |                   |      
|Dividend paid                              |               |                 |                                                    |                   |      
|Appropriation for distribution of dividend |               |                
|subsequent to balance sheet date           |               |                 |                                                    |                   |      
|                                           |               |                 |                                                    |                   |      
|BALANCE AT DECEMBER 31, 2004               |               |                 |                                                    | 2,832             |      
|                                           |               |                 |                                                    |                   |      

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

6

---

---



(Continued)  1

OPHIR HOLDINGS LTD. 
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                             | 2004 | 2003 | 2002
|---------------------------------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                        |      |      |     
|Net income (loss) for the year                                               |      |      |     
|Adjustments required to reflect the cash flows from operating activities*    |      |      |     
|                                                                             |      |      |     
|Net cash provided by operating activities                                    |      |      |     
|                                                                             |      |      |     
|CASH FLOWS FROM INVESTING ACTIVITIES:                                        |      |     
|Proceeds from sale of investments in other companies                         |      |      |     
|Proceed from sale of leased buildings                                        |      |      |     
|Investment in associated companies (including capital notes and loans - net) |      |      |     
|Investments in other companies                                               |      |      |     
|Withdrawal of long-term bank deposit                                         |      |      |     
|Short-term bank deposits, net                                                |      |      |     
|Proceeds from sale of business inventory                                     |      |      |     
|Proceeds from sale of other assets                                           |      |      |     
|Advances on account of rental property designated for sale                   |      |      |     
|Dividend received                                                            |      |      |     
|Loan to a company which is an interested party - net                         |      |      |     
|                                                                             |      |      |     
|Net cash provided by  investing activities                                   |      |      |     
|                                                                             |      |      |     
|CASH FLOWS FROM FINANCING ACTIVITIES:                                        |      |     
|Repayment of long-term bank loans- net                                       |      |      |     
|Dividend paid                                                                |      |      |     
|Short-term bank credit and loans - net                                       |      |      |     
|                                                                             |      |      |     
|Net cash used in financing activities                                        |      |      |     
|                                                                             |      |      |     
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                             |      |      |     
|BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF                         |      |     
|YEAR                                                                         |      |      |     
|                                                                             |      |      |     
|BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR                          |      |      |     
|                                                                             |      |      |     

7

---

---



(Concluded)  2

OPHIR HOLDINGS LTD. 
CONSOLIDATED  STATEMENTS
OF CASH FLOWS

|                                                                          | 2004 | 2003 | 2002
|------------------------------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|* Adjustments required to reflect the cash flows from operating           |      |      |     
|activities:                                                               |      |     
|Income and expenses not involving cash flows:                             |      |     
|Share in losses (profits) of associated companies - net                   |      |      |     
|Depreciation                                                              |      |      |     
|Deferred income taxes - net                                               |      |      |     
|Minority interest in losses of a subsidiary (2002 - net of dividend paid) |      |      |     
|Gain from sale of fixed assets and business inventory - net               |      |      |     
|Gain from sale of other assets                                            |      |      |     
|Loss  from sale of leased buildings                                       |      |      |     
|Gain from sale and increase in value of marketable securities             |      |     
|(Including shares classified as other investments) - net                  |      |      |     
|Gain from sale of investment  in another company                          |      |      |     
|Impairment (reversal of impairment) of investment in associated           |      |     
|companies and others                                                      |      |      |     
|Linkage differences (erosion) on long-term bank loans- net                |      |      |     
|Linkage differences on short-term loan to                                 |      |     
|a related party                                                           |      |      |     
|Linkage differences and interest on loans to associated companies and     |      |     
|others                                                                    |      |      |     
|                                                                          |      |      |     
|                                                                          |      |      |     
|                                                                          |      |      |     
|Changes in operating asset and liability items:                           |      |     
|Decrease (increase) in accounts receivable                                |      |      |     
|Decrease in accounts payable and accruals                                 |      |      |     
|                                                                          |      |      |     
|                                                                          |      |      |     
|                                                                          |      |      |     
|                                                                          |      |      |     
|                                                                          |      |      |     

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,except for the
changes required by the transition to nominal financial reporting in 2004 see
b(1),are as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | The
subsidiary Merkazim Investments Ltd. is engaged in the renting of commercial buildings.
In 2003, this company sold all its holdings in the commercial buildings that were
designated for rent (see note 5b.).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
subsidiary, New Horizons (1993) Ltd., holds a number of properties (designated for sale),
which were purchased from a related party, see also note 8a(2).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
to the activities of the associated companies, see note 3c.
| | --------------------------------------------------------------

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

| | Subsidiary - | a company controlled or owned to the extent of over 50%,
the financial statements of which have been consolidated
with the financial statements of Ophir.
| | ------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | Associated company - | a company controlled to the extent of 20% or over (which is not a
subsidiary), or a company less than 20% controlled which complies
with the condition relating to "significant influence", as
prescribed by Opinion 68 of the Institute of Certified Public
Accountants in Israel (the "Israeli Institute"), the investment in
which is presented by the equity method.
| | -------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The Group - | Ophir, 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
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

---

---



OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 1 |  | SIGNIFICANT
ACCOUNTING POLICIES
|------ | - | -------------------------------

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

| | The
Company draws up and presents its financial statements in Israeli currency (shekels or
NIS). Commencing 2004, the adjustment of financial statements for the effects
of inflation in Israel was discontinued, and transitory provisions for financial
reporting on a nominal basis began being applied, as explained below; notwithstanding the
above, the comparative figures included in these financial statements are based on the
adjusted-for-inflation amounts previously reported:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 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 2003 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, 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 consumer price
index for December 2003 (the CPI in effect at the transition           date).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

---

---



| | 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.?
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

---

---



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 Ophir and its
          subsidiaries. The companies included in consolidation are listed in note 2.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | These
securities (except for investment in shares constituting permanent investment,
see f(3) below), are stated at market value.
| | -----------------------------------------------------------------------------------------------------------------------------------

| | The
changes in value of the above securities are carried to income.
| | -------------------------------------------------------------------

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

| | The
land is presented at cost, which  in managements estimation  is lower
than market value.
| | -----------------------------------------------------------------------------------------------

| | According
to the agreements for the purchase of land, the Company might pay additional costs of up
to 90% of the net sale proceeds, see also note 8a(2).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | (a) | The
investments in these companies are accounted for by the equity method. The
          balance of the investment as of December 31, 2004 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.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---

---



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

| | 2) | Cost
of fixed assets includes the Companys share in a joint venture           engaged
solely in construction of a building and rental thereof.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | Financial
expenses in respect of loans and credit applied to finance the           construction or
acquisition of buildings  incurred until construction was           completed  were
charged to cost of the buildings.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | The
assets are depreciated by the straight-line method, on basis of their           estimated
useful life. Annual rates of depreciation are 2% or 4%.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------

13

---

---



OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

| | In
February 2003, Accounting Standard No. 15 of the IASB  Impairment of
Assets  which is based on International Accounting Standard No. 36, became
effective. This standard requires a periodic review, at each balance sheet date, to
evaluate the need for a provision for the impairment of the Companys non-monetary
assets  fixed assets and investments in associated companies.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accordingly,
the Company assesses  at each balance sheet date  whether any events have
occurred or changes in circumstances have taken place, which might indicate that there
has been an impairment of one or more of the above assets. When such indicators of
impairment are present, the Company evaluates whether the carrying value of the
investment in the asset is recoverable from the cash flows anticipated from that asset,
and, if necessary, records an impairment provision up to the amount needed to adjust the
carrying amount to the recoverable amount.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
recoverable value of an asset is determined according to the higher of the net selling
price of the asset or its value in use to the Company. The value in use is determined
according to the present value of anticipated cash flows from the continued use of the
asset, including those expected at the time of its future retirement and disposal.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
impairment loss is carried directly to income. Where indicators are present that
beneficial events have occurred or beneficial changes in circumstances have taken place,
the impairment provision in respect of the asset (other than goodwill) may be cancelled
or reduced in the future, so long as the recoverable value of the asset has increased, as
a result of changes in the estimates previously employed in determining such value. 
In 2004 the company recorded an impairment charge on its investment in Lysh of NIS 950
thousand.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

14

---

---



OPHIR HOLDINGS LTD. 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

| | m. | Linkage
basis
| | -- | -------------

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

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

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

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

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

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

| | In
July 2004, the IASB issued Israel Accounting Standard No. 19  Taxes on Income,
which is based on International Accounting Standard No. 12, that prescribes the
accounting treatment (recognition criteria, measurement, presentation and disclosure)
required for taxes on income. This accounting standard is to be applied to financial
statements covering periods commencing on, or after, January 1, 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the most part, the provisions of this standard are the same as the accounting principles
that are customarily applied at present (see h. above). The adoption of the standard is
not expected to have a material effect on the Companys financial statements in the
forthcoming periods.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

---

---



OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 2 |  | Following
is a list of the subsidiaries consolidated in Ophirs financial statements:
|------ | - | -------------------------------------------------------------------------------------

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

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

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

|                                                  | December 31
|------------------------------------------------- | -----------
|
|
|
|
|Equity in net assets:                             |            
|Cost of shares                                    |            
|Share in accumulated undistributed profit (1)     |            
|Share in capital surplus derived by Mivnat        |            
|Holdings Ltd. from sale of its investment         |            
|in Industrial Buildings Ltd. to its               |            
|shareholders (see c(1) below and 4(a)) (1)        |            
|                                                  |            
|                                                  |            
|Long-term loans (2)                               |            
|L e s s - provision for impairment of investment, |            
|see c(2), (3) below                               |            
|                                                  |            
|                                                  |            
|                                                  |            

| | (1) | Including
accumulated erosion of capital notes and gains on dilution of holding           in
associated companies resulting from issuance of shares to a third party.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The
loans are linked to the Israeli CPI, bear interest at annual rates of 4%-5%           and
have no fixed maturity date.
| | --- | --------------------------------------------------------------------------------------------------------------------------

| | b. | The
changes in the investments in 2004 are as follows:
| | -- | ------------------------------------------------------

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

16

---

---



OPHIR HOLDINGS LTD. 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

| | Mivnat
was established in March 1993 by Ophir, the subsidiary Merkazim and others, some of whom
were interested parties, in order to acquire the Israeli Governments shares in
Industrial Buildings Ltd. (Industrial Buildings). During March 1993, Mivnat
acquired these shares in consideration of NIS 1,053 million. Ophir holds 18.75%
interest in Mivnat directly, and 25% interest jointly with Merkazim.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
described in note 4(a), on December 31, 1998, Mivnat sold its holdings in Industrial
Buildings to its shareholders (including Ophir). Upon the consummation of the
transaction, Mivnat ceased to have any rights in the shares of Industrial Buildings.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Company, along with a group of companies, established the Shmey-Bar companies in 1993.
These companies were established for the purpose of dealing in development of
fruit-bearing properties. They purchased rights to real estate and options to purchase
real estate in Tel-Aviv, Haifa, Beer-Sheva, Kiryat Shemona, Eilat, Jerusalem, Holon,
Tel-Hanan and Ramla, all from Hamashbir Hamerkazi Israel Cooperative Wholesale Society
Ltd. The Companys holdings in Shmey-Bar companies total 22.3%.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 31, 2002, the Company wrote down its investment in the Shmey-Bar companies
by NIS 5,004,000.
| | --------------------------------------------------------------------------------------------------------

17

---

---



OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

| | In
June 1999, the Company entered into an investment agreement with Lysh Commercial and Road
Services Ltd. (L2), a company controlled by Polar Investments Ltd.  an
interested party in the Company, and with L1, a wholly-owned subsidiary of L2.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | L1
has a 50% holding in Beit Herut-Lysh Development Company Ltd. (BHL), which
has invested in a project for the leasing of commercial premises near Moshav Beit Herut
(the project).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | BHL
developed 16,850 square meters of land owned by the Israel Lands Administration (the
Administration), in accordance with resolution 717 of the Administration. A
commercial project occupying approximately 10,000 square meters was constructed on that
land 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,
2004 and 2003, 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, 2004, the Companys share in the loans
made to BHL amounts to approximately NIS 16 million.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
auditors of L1, while not qualifying their opinion on L1s financial statements for
2004, drew attention to the financial position of BHL, whose financial statements
presented a loss of approximately NIS 3.7 million (net of financial expenses in the
amount of NIS 5.4 million) and negative working capital amounting to
approximately NIS 2.0 million at December 31, 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2004, BHL received shareholders loans in the amount of approximately NIS 1.8
million from L1. In addition, during the reported period, BHL reached an arrangement with
a bank, which has not yet been put in writing, which postpones the repayment of the
principal of the loans until January 2005 and schedules the repayment of the balance of
the loan over a period 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
|----------------------------------------------------------- | ------------
|
|
|
|
|Industrial Buildings (a)                                    |             
|Memadim Investments Ltd. ("Memadim") (b)                    |             
|Mahalachim Investment in Technology Ltd. ("Mahalachim") (c) |             
|Others                                                      |             
|                                                            |             
|                                                            |             
|                                                            |             

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

| | 1. | On
December 31, 1998, Mivnat sold to its shareholders (including the           Company)
its entire holding in the issued and paid share capital of Industrial           Buildings
(see note 3c(1)). Within the framework of this transaction, the           Company
acquired from Mivnat 13% of the issued and paid share capital of           Industrial
Buildings  37,227,210 ordinary shares of NIS 1 par value           and
2,978,177 warrants (Series 3) in consideration of NIS 279,830,000. The
          shares acquired as above have been pledged in favor of a bank to secure loans
          received from it.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2001, the Company sold 576,633 shares of Industrial Buildings in consideration of NIS 3.7
million. The pre-tax gain that the Company derived from this sale is approximately NIS 411,000.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2002, the Company sold 1,027,653 shares of Industrial Buildings in consideration of
approximately NIS 6.6 million, at a pre-tax gain of approximately NIS 625,000.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In
2004, the Company sold 4,400,036 shares of Industrial Buildings in consideration of
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.
| | ---------------------------------------------------------------------------------------------

| | 2. | The
shares of Industrial Buildings are traded on the Tel-Aviv Stock Exchange.           The
market value of the holdings of the Company in the total shares of           Industrial
Buildings, presented both in other investments and in           marketable
securities, at December 31, 2004 and 2003 is           approximately NIS 155.7 million
and NIS 153.6 million,           respectively.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19

---

---



OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

| | On
December 31, 2004, the Companys board of directors decided to realize an
additional package of shares, comprising approximately 17.7 million shares. In light of
the above, the shares that were to be realized were classified as marketable securities,
and were revalued in accordance with the shares price at balance sheet date (NIS 4.883
per share). The gain from the shares revaluation, as recorded by the Company,
amounted to approximately NIS 2 million. Pursuant to the aforementioned decision, 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 3.6 million.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
proceeds from the sale of said shares will be used in 2005 for the repayment of the bank
loan, in respect of which the shares had been pledged, in the amount of approximately NIS 67.1
million.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
February 9, 2005, the Companys board of directors decided to distribute the
remaining shares of Industrial Buildings, in the amount of NIS 80,930,000, to
shareholders, as a quasi-dividend. Additionally, the board decided to distribute the
balance of cash, in the amount of NIS 9,900,000, 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, and Industrial Buildings holds 40% of the ownership and
control of Memadim.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

20

---

---



OPHIR HOLDINGS LTD. 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 5 |  | FIXED
ASSETS:
|------ | - | -------------

| | a. | Changes
in assets (buildings for rent, including land) during 2004 are as follows:
| | -- | ----------------------------------------------------------------------------------

|     | Cost | Accumulated
depreciation | Depreciated
balance
|---- | ---- | ------------------------ | -------------------
|
|
|
|
|2004 |      |                          |                    
|     |      |                          |                    
|2003 |      |                          |                    
|     |      |                          |                    

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

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

| | On
April 14, 2003, the partners entered into a lease agreement with the Administration.
The lease expires on October 31, 2037. The annual lease fees payable by the
partnership amount to NIS 30,000.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
order to secure the completion of the registration of an unaffiliated party, who had
purchased an area of approximately 900 square meters of the area of the building in 1999,
with the Land Registry, the Company has provided a guarantee of NIS 3.8 million in
favor of the buyer.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | In
December 2002, Merkazim has entered into agreements for the sale of four buildings for a
consideration of NIS 27,282,000. The sale of the buildings was completed in 2003.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
June 2003, Merkazim entered into another agreement for the sale of a real estate asset in
return for NIS 2,639,000.
| | - | ----------------------------------------------------------------------------------------------------------------------

| |  | In
July 2003, Merkazim entered into an additional agreement for the sale of a real estate
asset in return for NIS 13,860,000.
| | - | -----------------------------------------------------------------------------------------------------------------------------

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

21

---

---



OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 6 |  | LONG-TERM
BANK LOANS:
|------ | - | ---------------------

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

| | b. | The
loans are scheduled to mature in the following years after the balance sheet
          dates:
| | -- | -------------------------------------------------------------------------------------------------

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

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

| | d. | As
to events that occurred after balance sheet date, see note 4a(2).
| | -- | --------------------------------------------------------------------

|NOTE 7 |  | CAPITAL
NOTES:
|------ | - | --------------

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

| | Capital
notes with an aggregate par value of NIS 151,351,000 are repayable at par, upon
demand of Mivnat, on January 1, 2005 and only on that date. After balance sheet
date, the shareholders of Mivnat decided to extend the repayment date until January 1,
2006. 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, Ophir 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, 2006.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | In
2002, the subsidiary New Horizons issued capital notes with a par value of
               NIS 119,000 and NIS 1,069,000 to Ophir and the minority
shareholder in                the subsidiary, respectively. Ophir 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.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22

---

---



OPHIR HOLDINGS LTD. 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 8 |  | COMMITMENTS,
CONTINGENT LIABILITIES, PLEDGES AND LIMITATIONS INRESPECT OF LIABILITIES:
|------ | - | --------------------------------------------------------------------------------------

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

| | 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, 2004, the balance
          of the loans to Memadim amounts to approximately NIS 89 million.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | 4) | Ophir
and a subsidiary receive various services from the shareholders in Ophir,
          including management services, head office services, bookkeeping and legal
          services. As to the expenses recorded in respect of such services, see
          note 11.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 1) | The
tax authorities have issued betterment tax assessments for the subsidiary
          Merkazim, claiming that the actual betterment derived was higher than that
          reported by the subsidiary and demanding the payment of additional tax in the
          amount of approximately NIS 2.5 million. In the opinion of the
          Companys management, appropriate provisions were included in the
financial           statements.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | As
to a guarantee in favor of buyers of premises in a building, see note 5b(1).
| | -- | -------------------------------------------------------------------------------

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

| | To
secure repayment of long-term bank loans in the total amount of NIS 67 million consolidated
and the Company  at December 31, 2004, Ophir and Merkazim have undertaken
towards the bank that the Companys shareholders equity will not fall below NIS 76 million,
the total consolidated liabilities will not be more than 3.25 times the shareholders equity,
and the average annual net income for the recent three years will not, at any time, fall
below NIS 7.6 million. As of balance sheet date, the Company has not met its
obligation to maintain the aforementioned level of annual net income. On December 22,
2004, the Company received the banks approval that the original repayment schedule
is not to be changed, despite the Companys failure to meet its obligation, as
above. This approval is limited to the period ending on January 1, 2006.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Subsequent
to the date of the financial statements, the Company sold the Industrial buildings shares
in an amount equal to the outstanding balance of the loan. The sale proceeds were
deposited in a bank deposit and are intended for the use of repayment of the outstanding
balance of the bank loan. Following the repayment of the loan the above restrictions will
be canceled.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23

---

---



OPHIR HOLDINGS LTD. 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

|NOTE 9 |  | SHARE
CAPITAL
|------ | - | -------------

| | a. | Composed
at December 31, 2004 and 2003 as follows:
| | -- | --------------------------------------------------

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

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

| | b. | In
December 2004, the Company announced and distributed a dividend to its
               shareholders in the amount of NIS 30 million.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------

| | c. | As
to an event that occurred after balance sheet date, see note 4a.
| | -- | -------------------------------------------------------------------

24

---

---



OPHIR HOLDINGS LTD. 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 10 |  | TAXES
ON INCOME:
|------- | - | ----------------

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

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

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

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

|                             | Depreciable
fixed assets
|---------------------------- | ------------------------
|
|
|
|
|Balance at January 1, 2003   |                         
|Changes in 2003 -            |                         
|amounts carried to income    |                         
|                             |                         
|Balance at December 31, 2003 |                         
|Changes in 2004 -            |                         
|amounts carried to income    |                         
|                             |                         
|Balance at December 31, 2004 |                         
|                             |                         

| | 2) | The
deferred taxes as of December 31, 2004 are computed at the tax rate of
          30%.
| | -- | -----------------------------------------------------------------------------------------

| | c. | 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%.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

25

---

---



OPHIR HOLDINGS LTD. 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 10 |  | TAXES
ON INCOME (continued):
|------- | - | ----------------------------

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

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

|                            | 2004 | 2003 | 2002
|--------------------------- | ---- | ---- | ----
|
|
|
|
|For the reported year:      |      |      |     
|Current                     |      |      |     
|Deferred, see also b. above |      |      |     
|                            |      |      |     
|                            |      |      |     
|                            |      |      |     
|For previous years:         |      |     
|Current                     |      |      |     
|Deferred, see also b. above |      |      |     
|                            |      |      |     
|                            |      |      |     
|                            |      |      |     
|                            |      |      |     
|                            |      |      |     

| | Current
taxes are computed at the tax rate of 35% for 2004 (36%  2003 and 2002).
| | ---------------------------------------------------------------------------------

26

---

---



# 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:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                          | 2004 | 2003 | 2002
|------------------------------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|Income (loss) before taxes on income as reported in the income statements |      |      |     
|A d d (less) - share in losses (profits) of associated companies - net    |      |      |     
|                                                                          |      |      |     
|B a l a n c e - income (loss)                                             |      |      |     
|                                                                          |      |      |     
|Theoretical tax expense (tax saving)                                      |      |      |     
|Increase (decrease) in taxes resulting from permanent                     |      |     
|differences - the tax effect:                                             |      |     
|Disallowable deductions (exempt income)                                   |      |      |     
|Differences for which deferred taxes were not created in previous         |      |     
|years, net                                                                |      |      |     
|Taxes on income subject to different rates -                              |      |     
|dividends received from other companies                                   |      |      |     
|Taxes in respect of previous years                                        |      |      |     
|Sundry - net                                                              |      |      |     
|                                                                          |      |      |     
|Taxes on income for the reported year                                     |      |      |     
|                                                                          |      |      |     

| | e. | Tax
assessments
| | -- | ---------------

| | Ophir
has received final assessments through tax year 2000.
| | -----------------------------------------------------------

| | Subsidiaries:
Merkazim
 assessments that are considered as final through tax year 2000 (see also note
8(b)(1).  
New
Horizons  assessments that are considered as final through tax year 2000. Ophir
Financing Ltd.  final assessments have been received through tax year 2000.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27

---

---



OPHIR HOLDINGS LTD. 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 10 |  | TAXES
ON INCOME (continued):
|------- | - | ----------------------------

|NOTE 11 |  | TRANSACTIONS
AND BALANCES WITH INTERESTED PARTIES AND RELATED PARTIES:
|------- | - | ----------------------------------------------------------------------

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

|                                                     | 2004 | 2003 | 2002
|---------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|Income (expenses):                                   |      |      |     
|Financial income in respect of short-term loans to   |      |     
|shareholders                                         |      |     
|Financial income in respect of loans to              |      |     
|associated companies                                 |      |      |     
|                                                     |      |      |     
|Management fees from other company                   |      |      |     
|                                                     |      |      |     
|Included in general and administrative expenses      |      |      |     
|                                                     |      |      |     
|Participation in expenses of shareholders and a      |      |     
|corporate interested party                           |      |      |     
|                                                     |      |      |     
|Financial income (expenses) in respect of short-term |      |     
|loans with a corporate interested party              |      |      |     
|                                                     |      |      |     

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

28

---

---



OPHIR HOLDINGS LTD. 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

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

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

| | (2) | The
loans are linked to the Israeli CPI and bear annual interest at the rate of
          4%-5%.
| | --- | ------------------------------------------------------------------------------------------------

| | As
to current balances with associated and other companies, see note 13b.
| | -------------------------------------------------------------------------

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

29

---

---



OPHIR HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 12 |  | LINKAGE
OF MONETARY BALANCES:
|------- | - | -----------------------------

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

|                                    | December 31, 2004
|----------------------------------- | -----------------
|
|
|
|
|Assets:                             |                  
|Current assets:                     |                  
|Cash and cash equivalents           |                  
|Short-term investments              |                  
|Accounts receivable                 |                  
|Loan to a related interested party  |                  
|Loans to associated companies       |                  
|                                    |                  
|                                    |                  
|                                    |                  
|Liabilities:                        |                  
|Current liabilities:                |                  
|Accounts payable and accruals       |                  
|Long-term liabilities:              |                  
|Bank loans (including current       |                  
|maturities)                         |                  
|Capital notes to associated company |                  
|Capital note to an interested party |                  
|                                    |                  
|                                    |                  
|                                    |                  

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

|                                     | Exchange rate
of one dollar | Israeli
CPI*
|------------------------------------ | --------------------------- | ------------
|
|
|
|
|At end of year:                      |                             |             
|2004                                 |                             |             
|2003                                 |                             |             
|2002                                 |                             |             
|2001                                 |                             |             
|                                     |                             |             
|Increase (decrease) during the year: |                             |             
|2004                                 |                             |             
|2003                                 |                             |             
|2002                                 |                             |             

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

30

---

---



OPHIR HOLDINGS LTD. 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 13 |  | SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION:
|------- | - | ----------------------------------------------

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

|                                  | December 31
|--------------------------------- | -----------
|
|
|
|
|a. Accounts receivable:           |            
|Deposits in respect of sale       |            
|of fixed assets                   |            
|Associated companies              |            
|and others                        |            
|Shareholders - current accounts   |            
|Other                             |            
|                                  |            
|                                  |            
|                                  |            
|                                  |            
|                                  |            
|b. Bank credit:                   |            
|Short-term credit and loans       |            
|Current maturities of long- term  |            
|loans, see note 6                 |            
|                                  |            
|                                  |            
|                                  |            
|                                  |            
|                                  |            
|c. Accounts payable and accruals: |            
|Trade                             |            
|Institutions                      |            
|Accrued expenses                  |            
|Interested party - current        |            
|account                           |            
|Shareholders - current accounts   |            
|Other                             |            
|                                  |            
|                                  |            
|                                  |            

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

| | The
Groups cash and cash equivalents and short-term investments at December 31,
2004 and 2003 are deposited with Israeli banks. The Company is of the opinion that the
credit risk in respect of these balances is remote.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

31

---

---



OPHIR HOLDINGS LTD. 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 13 |  | SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION (continued):
|------- | - | ----------------------------------------------------------

|                                               | 2004 | 2003 | 2002
|---------------------------------------------- | ---- | ---- | ----
|
|
|
|
|f. Financial expenses (income) - net:          |      |      |     
|                                               |      |     
|Financial expenses:                            |      |     
|In respect of long-term loans                  |      |      |     
|In respect of short-term bank credit           |      |      |     
|In respect of a short-term loan from a company |      |     
|which is an interested party                   |      |      |     
|Other                                          |      |      |     
|                                               |      |      |     
|                                               |      |      |     
|                                               |      |      |     
|Financial income:                              |      |     
|In respect of bank deposits                    |      |      |     
|In respect of short-term loans to associated   |      |     
|companies                                      |      |      |     
|In respect of a loan to a company              |      |     
|which is an interested party                   |      |      |     
|Assigned interest and linkage differences      |      |      |     
|Other                                          |      |      |     
|                                               |      |      |     
|                                               |      |      |     
|                                               |      |      |     
|                                               |      |      |     
|                                               |      |      |     

32

---

---



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 is 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 is to hold some of this
investment for a long period, it is partly stated at cost, net of impairment for decrease
in value, which is not of a temporary nature (see also note 4).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

33

---

---



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:
| | -- | ------------------

|                                         | 2004 | 2003 | 2002
|---------------------------------------- | ---- | ---- | ----
|
|
|
|
|Net income (losses) as reported in these |      |      |     
|financial statements according           |      |     
|to Israeli GAAP)                         |      |      |     
|Effect of the treatment of the following |      |     
|items under U.S. GAAP:                   |      |     
|Reversal of the adjustment due to        |      |     
|effect of inflation                      |      |      |     
|Reversal of the adjustment due to        |      |     
|Marketable securities- aviliable         |      |     
|for sale                                 |      |      |     
|Other                                    |      |      |     
|                                         |      |      |     
|Net income under U.S. GAAP               |      |      |     
|                                         |      |      |     
|                                         |      |      |     

| | 2) | Shareholders'
equity:
| | -- | ---------------------

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

34

---

---



# 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:
| | -- | -------------------------------------------------------------------------------------------------------

|                               | 2004 | 2003 | 2002
|------------------------------ | ---- | ---- | ----
|
|
|
|
|Net income as recorded to      |      |      |     
|U.S. GAAP, see above           |      |      |     
|Other comprehensive            |      |     
|income - gains not reported in |      |     
|the income statement           |      |     
|Unrealized gains on            |      |     
|marketable securities          |      |      |     
|                               |      |      |     
|Comprehensive income (losses)  |      |      |     
|                               |      |      |     
|                               |      |      |     

35

---

---





INDEPENDENT AUDITORS REPORT

TO THE SHAREHOLDERS

OF AM-HAL LTD.



We have audited the accompanying balance sheets of Am-Hal Ltd. (the Company) and the consolidated balance sheets of the Company and a consolidated partnership as of December 31, 2003 and 2002, and the related statements of operations, changes in shareholders 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the principles used and significant estimates made by Companys management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position - of the Company and on a consolidated basis - as of December 31, 2003 and 2002, and the results of operations, changes in shareholders 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 Accountants



Tel Aviv, February 15, 2004



---

---



INDEPENDENT AUDITORS SPECIAL REPORT



We have audited the balance sheets of Am-Hal Ltd. (the Company) and the consolidated balance sheets of the Company and a consolidated partnership as of December 31, 2003 and 2002, and the related statements of operations, changes in shareholders deficiency and cash flows - of  the Company and on a consolidated basis - for each of the three years in the period ended December 31, 2003, and have issued our unqualified report thereon dated February 15, 2004. The aforementioned financial statements (not presented separately herein) were prepared in new Israeli shekels (NIS) on the historical cost basis, adjusted for changes in the general purchasing power of the NIS in accordance with standards established by the Institute of Certified Public Accountants in Israel.



As described in Note 2B, the accompanying Company and consolidated financial data in U.S. dollars as of the abovementioned dates and for the abovementioned years then ended were prepared on the basis of financial data in nominal NIS (the basis on which the Company and consolidated adjusted NIS financial statements were also prepared), translated into US dollars in accordance with the principles described in Note 2B.



This report is intended solely for the information and use of the Boards of Directors and management of the Company and Ampal-American Israel Corp., and should not be used for any other purpose.





Brightman Almagor & Co.

Certified Public Accountants



Tel Aviv, February 15, 2004















---

---



INDEPENDENT AUDITORS REPORT

TO THE SHAREHOLDERS OF

BAY HEART LTD. AND SUBSIDIARY



We have audited the accompanying balance sheets of Bay Heart Ltd. (the Company) as of December 31, 2004 and 2003, 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, 2004. 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, 2004 and 2003, 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, 2004, 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 as of the dates and reporting periods subsequent to December 31, 2003 are presented in reported amounts, in accordance with the accounting standards of the Israeli Accounting Standards Board. The financial statements as of the dates and reporting periods ended as of the above dates are presented in values adjusted until then based on the changes in the general purchasing power of the Israeli currency in accordance with pronouncements of the Institute of Certified Public Accountants in Israel.



The condensed consolidated financial information in U.S. dollars presented in Note 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 8, 2005.



---

---



To the Shareholders of



CARMEL CONTAINER SYSTEMS LTD.



We have audited the accompanying
consolidated balance sheets of Carmel Container Systems Ltd. ("the Company") and its
subsidiaries as of December 31, 2003 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, 2004. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We did not audit the financial
statements of a subsidiary whose assets constitute approximately 10% and 9% of total
consolidated assets as of December 31, 2003 and 2004 respectively, and whose revenues
constitute approximately 9%, 10% and 8% of total consolidated revenues for the years
ended December 31, 2002, 2003 and 2004 respectively. The financial statements of this
subsidiary were audited by other auditors whose reports have been furnished to us, and
our opinion, insofar as it relates to amounts included for this subsidiary is based on
the reports of the other auditors.

We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United
States) and standards generally accepted in the Israel, including those prescribed by the
Israeli Auditors' Regulations (Auditor's Mode of Performance), 1973. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other auditors
provide a reasonable basis for our opinion.

In our opinion, based on our audits
and the reports of other auditors, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries as of December 31, 2003 and 2004, and the consolidated
results of their operations, changes in shareholders equity and cash flows for each
of the three years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in Israel, which differ in certain respects from those
generally accepted in the United States (see Note 21 to the consolidated financial
statements).

As
described in Note 2b, 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 Israel 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.



|Haifa, Israel,    | KOST FORER GABBAY & KASIERER    
|----------------- | --------------------------------
|February 24, 2005 | A Member of Ernst & Young Global



---

---



REPORT OF INDEPENDENT AUDITORS

TO THE SHAREHOLDERS

OF CORAL WORLD INTERNATIONAL LTD.

We have audited the accompanying consolidated balance sheets ofCoral World International Ltd.(the Company) as of December 31, 2004 and 2003, 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, 2004.  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 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.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by the Board of Directors and management 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, 2004 and 2003, and the results of its operations, changes in its shareholders equity and cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States.



Fahn Kanne & Co.

Certified Public Accountants (Isr.)



Tel-Aviv, Israel, February 28, 2005



---

---









Report of Independent Public Accountants





To The Shareholders of Country Club Kfar Saba Ltd.



We have audited the balance sheet of Country Club Kfar Saba Ltd. as of December 31, 2002 and the related statements of income, changes in shareholders equity and cash flows for the year then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.



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



The above statements have been prepared on the basis of historical cost as adjusted for the changes in the general purchasing power of the Israel currency in accordance with pronouncements issued by the Institute of Certified Public Accountants in Israel.



In our opinion, the above-mentioned financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and the results of its operations, changes in shareholders equity and cash flows for the year then ended, in conformity with accounting principles generally accepted in Israel, which differ in certain respects from, accounting principles generally accepted in the United States (see Notes 2F and 16).





| |  | Luboshitz Kasierer
Certified Public Accountants (Isr.)
| |  | ------------------------------------------------------



March 5, 2003



---

---



| |  | Kost Forer Gabbay & Kasierer
3 Aminadav St.              
Tel-Aviv 67067, Israel |  | Phone:   972-3-6232525
Fax:     972-3-5622555
| |  | -------------------------------------------------------------------------------- |  | ---------------------------------------------



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the shareholders of



EPSILON INVESTMENT HOUSE LTD.



We have audited the balance sheets of Epsilon Investment House Ltd.("the Company") as of December 31, 2004 and 2003, and the consolidated balance sheets as of such date and the related statements of income, changes in shareholders' equity and cash flows - Company and consolidated - for the years then ended expressed in New Israeli Shekels (not presented herein). These financial statements are the responsibility of the Companys board of directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of an investee company have been audited by other auditors whose report has been furnished to us; insofar as our opinion on the consolidated financial statements relates to the amounts included for the investee, it is based solely on their report. In the consolidated financial
statements, the Company's investment in the investee is stated at NIS 331 thousand and NIS 26 thousand, respectively, at December 31, 2004 and 2003, and the Company's equity in the net income of the investee is stated at NIS 305 thousand and NIS 25 thousand for the years then ended.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in Israel, including those prescribed by the Auditors Regulations (Auditor's Mode of Performance)-1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by the board of directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.



In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position - of the Company and consolidated - as of December 31, 2004 and 2003, and the results of operations, changes in shareholders' equity and cash flows - of the Company and consolidated - for the years then ended, in conformity with generally accepted accounting principles in Israel, which differ in certain respects from those generally accepted in the United States (see Note 20 to the financial statements).



As described in Note 2a, the financial statements as of the dates and for the reported periods subsequent to December 31, 2003, are presented in reported amounts, in conformity with Accounting Standards of the Israeli Accounting Standards Board. The financial statements as of the dates and for the reported periods until the aforementioned date are presented in values that were adjusted until that date according to the changes in the general purchasing power of the Israeli currency, in accordance with pronouncements of the Institute of Certified Public Accountants in Israel.



|Tel-Aviv, Israel   |  | KOST FORER GABBAY & KASIERER    
|------------------ |  | --------------------------------
|February 24 , 2005 |  | A Member of Ernst & Young Global





---

---



To the Shareholders of Hod Hasharon Sport Center Limited :



We have audited the balance sheets of Hod Hasharon Sport Center Limited  as at December 31, 2004 and 2003, the related statements of income and shareholders' equity  for each of the three years in the period ended December 31, 2004, expressed in New Israeli Shekels.  These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with standards of Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in Israel, including those prescribed by the Israeli Auditors (Mode of Performance) Regulations, 1973. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentations.  We believe that our audits provide a reasonable basis for our opinion.



Condensed statements in historical values appear in Note 6 to the financial statements.  These amounts have been translated into U.S. dollars using the method described in Note 2b.



In our opinion, based on our audit and the reports of other auditors, the above-mentioned financial statements present fairly the financial position of the Company as at December 31, 2004 and 2003, the results of its operations, the changes in shareholders' equity  for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in Israel, consistently applied.  Also, in our opinion, the financial statements based on nominal data (Note 6) present fairly, in conformity with generally accepted accounting principles, the financial position of the Company as at December 31, 2004 and 2003, and the results of its operations, the changes in shareholder equity  for each of the three years in the period ended December 31, 2004, on the basis of the historical cost convention.



As explained in note 2b, 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 differ in certain respects from accounting principles generally accepted in the United States.  The application of the latter would have affected the determination of nominal/historical net income and shareholders' equity to the extent summarized in Note 6 to the financial statements.



Somekh Chaikin

Certified Public Accountants (Isr)



February 24, 2005



---

---









Report of Independent Public Accountants





To The Shareholders of Hod Hasharon Sport Center Ltd.



We have audited the balance sheet of Hod Hasharon Sport Center Ltd. as of December 31, 2002 and the related statements of income, changes in shareholders equity and cash flows for the year then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.



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



The above statements have been prepared on the basis of historical cost as adjusted for the changes in the general purchasing power of the Israel currency in accordance with pronouncements issued by the Institute of Certified Public Accountants in Israel.



In our opinion, the above-mentioned financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and the results of its operations, changes in shareholders equity and cash flows for the year then ended, in conformity with accounting principles generally accepted in Israel, which differ in certain respects from, accounting principles generally accepted in the United States (see Notes 2D and 7).





| |  | Luboshitz Kasierer
Certified Public Accountants (Isr.)
| |  | ------------------------------------------------------



February 27, 2003





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To the Shareholders of Hod Hasharon Sport Center (1992) Limited Partnership :



We have audited the balance sheets of Hod Hasharon Sport Center (1992) Limited Partnership as at December 31, 2004 and 2003, the related statements of income and shareholders' equity and cash flows for each of the three years in the period ended December 31, 2004, expressed in New Israeli Shekels.  These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with standards of Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in Israel, including those prescribed by the Israeli Auditors (Mode of Performance) Regulations, 1973. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentations.  We believe that our audits provide a reasonable basis for our opinion.



Condensed statements in historical values appear in Note 16 to the financial statements.  These amounts have been translated into U.S. dollars using the method described in Note 2h.



In our opinion, based on our audit and the reports of other auditors, the above-mentioned financial statements present fairly the financial position of the Company as at December 31, 2004 and 2003, the results of its operations, the changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in Israel, consistently applied.  Also, in our opinion, the financial statements based on nominal data (Note 16) present fairly, in conformity with generally accepted accounting principles, the financial position of the Company as at December 31, 2004 and 2003, and the results of its operations, the changes in shareholder equity, and its cash flows for each of the three years in the period ended December 31, 2004, on the basis of the historical cost convention.



As explained in note 2b, 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 differ in certain respects from accounting principles generally accepted in the United States.  The application of the latter would have affected the determination of nominal/historical net income and shareholders' equity to the extent summarized in Note 16 to the financial statements.





Somekh Chaikin

Certified Public Accountants (Isr)



February 24, 2005



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Report of Independent Public Accountants





To The Partners of Hod Hasharon Sport Center (1992) Limited Partnership.

We
have audited the balance sheet of Hod Hasharon Sport Center (1992) Limited Partnership as
of December 31, 2002 and the related statements of income, changes in patners equity
and cash flows for the year then ended. These financial statements are the responsibility
of the Partnerships management.

Our
responsibility is to express an opinion on these financial statements based on our audit.

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



The above statements have been prepared on the basis of historical cost as adjusted for the changes in the general purchasing power of the Israel currency in accordance with pronouncements issued by the Institute of Certified Public Accountants in Israel.



In our opinion, the above-mentioned financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 2002 and the results of its operations, changes in patners equity and cash flows for the year then ended, in conformity with accounting principles generally accepted in Israel, which differ in certain respects from, accounting principles generally accepted in the United States (see Notes 2E and 16).





| |  | Luboshitz Kasierer
Certified Public Accountants (Isr.)
| |  | ------------------------------------------------------



February 27, 2003



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| |  | Kost Forer Gabbay & Kasierer
3 Aminadav St.              
Tel-Aviv 67067, Israel |  | Phone:   972-3-6232525
Fax:     972-3-5622555
| |  | -------------------------------------------------------------------------------- |  | ---------------------------------------------





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the shareholders of



RENAISSANCE INVESTMENT COMPANY LTD.



We have audited the balance sheets of RenaissanceInvestment Company Ltd.("the Company") as of December 31, 2004 and 2003, and the consolidated balance sheet as of December 31, 2004, and the related statements of income, changes in shareholders' equity and cash flows of the Company for the years ended December 31, 2004 and 2003 and the consolidated statements of income and cash flows for the year ended  December 31, 2004, expressed in New Israeli Shekels (not presented herein). These financial statements are the responsibility of the Companys board of directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of an investee company have been audited by other auditors whose report has been furnished to us; insofar as our
opinion on the financial statements relates to the amounts included for the investee, it is based solely on their report. In the financial statements, the Company's investment in the investee is stated at NIS 3,571 thousand and NIS 1,070 thousand, respectively, at December 31, 2004 and 2003, and the Company's equity in the net income of the investee is stated at NIS 501 thousand and NIS 70 thousand for the years then ended.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in Israel, including those prescribed by the Auditors Regulations (Auditor's Mode of Performance)-1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by the board of directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.



In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of the Company  as of December 31, 2004 and 2003, and the consolidated financial position as of December 31, 2004 and the results of operations, changes in shareholders' equity and cash flows of the Company for the years ended December 31, 2004 and 2003 and the consolidated results of operations and cash flows for the year ended December 31, 2004, in conformity with generally accepted accounting principles in Israel, which differ in certain respects from those generally accepted in the United States (see Note 15 to the financial statements).



As described in Note 2a, the financial statements as of the dates and for the reported periods subsequent to December 31, 2003, are presented in reported amounts, in conformity with Accounting Standards of the Israeli Accounting Standards Board. The financial statements as of the dates and for the reported periods until the aforementioned date are presented in values that were adjusted until that date according to the changes in the general purchasing power of the Israeli currency, in accordance with pronouncements of the Institute of Certified Public Accountants in Israel.



|Tel-Aviv, Israel   |  | KOST FORER GABBAY & KASIERER    
|------------------ |  | --------------------------------
|February 24 , 2005 |  | A Member of Ernst & Young Global



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| |  | Kost Forer Gabbay & Kasierer
3 Aminadav St.              
Tel-Aviv 67067, Israel |  | Phone:   972-3-6232525
Fax:     972-3-5622555
| |  | -------------------------------------------------------------------------------- |  | ---------------------------------------------

Messrs. Ampal Ltd.



|Re: | Financial statements of Shmay-Bar Real Estate (1993) Ltd.
|--- | ---------------------------------------------------------
|    | ("the Company") translated into U.S. dollars             



As you know, the Company publishes in Israel financial statements in NIS adjusted to the changes in the Consumer Price Index, in accordance with Statements of the Institute of Certified Public Accountants in Israel. These primary annual financial statements of the Company for the years 2002 and 2001, which were audited by us, and on which we expressed our opinion on February 16, 2003, have been provided to you.



We have audited the accompanying translated U.S. dollar balance sheets of the Company as of December 31, 2002 and 2001, and the related translated U.S. dollar statements of income for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility  of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with generally accepted auditing standards in Israel and the United States, including those prescribed by the Israeli Auditors Regulations (Mode of Performance) (Israel), 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, either originating within the financial statements themselves, or due to any misleading statement included therein. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



The aforementioned translated U.S. dollar financial statements have been prepared on the basis of nominal NIS historical cost. Disclosure of the effect of the changes in the general purchasing power of the Israeli currency in the financial statements as stated in the Opinions of the Institute of Certified Public Accountants in Israel, has not been included in the above mentioned statements.



Full financial statement disclosures and statements of cash flows that  are as required according to generally accepted accounting principles have not been presented and as such, the translated U.S. dollar financial statements mentioned above are to be read in conjunction with the primary annual audited financial statements of the Company, as of December 31, 2002 and their accompanying Notes.



In our opinion, except for the effects of the matters discussed in the preceding paragraphs,  the translated U.S. dollar financial statements referred to above present fairly, in all material respects, the translated U.S. dollar financial position of the Company as of December 31, 2002 and 2001, and the related translated U.S. dollar results of its operations for each of the three years in the period ended December 31, 2002, in conformity with generally accepted accounting principles in Israel. As applicable to the Company's financial statements, accounting principles generally excepted in the United Sates and in Israel are substantially identical in all material respects.



Also, in our opinion, the translation of the aforementioned nominal figures into U.S. dollars was made in accordance with the principles set forth in SFAS 52, see Note 2.



The aforementioned financial statements are designated solely for you as shareholders of the Company, are not to be published or delivered to others.

|Tel-Aviv, Israel  |  | KOST FORER & GABBAY                    
|----------------- |  | ---------------------------------------
|February 16, 2003 |  | A Member of Ernst & Young International



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| |  | Kost Forer Gabbay & Kasierer
3 Aminadav St.              
Tel-Aviv 67067, Israel |  | Phone:   972-3-6232525
Fax:     972-3-5622555
| |  | -------------------------------------------------------------------------------- |  | ---------------------------------------------



Messrs. Ampal Ltd.



|Re: | Financial statements of Shmay-Bar (T.H) 1993 Ltd.
|--- | -------------------------------------------------
|    | ("the Company") translated into U.S. dollars     



As you know, the Company publishes in Israel financial statements in NIS adjusted to the changes in the Consumer Price Index, in accordance with Statements of the Institute of Certified Public Accountants in Israel. These primary annual financial statements of the Company for the years 2002 and 2001, which were audited by us, and on which we expressed our opinion on February 16, 2003, have been provided to you.



We have audited the accompanying translated U.S. dollar balance sheets of the Company as of December 31, 2002 and 2001, and the related translated U.S. dollar statements of income for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility  of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with generally accepted auditing standards in Israel and the United States, including those prescribed by the Israeli Auditors Regulations (Mode of Performance) (Israel), 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, either originating within the financial statements themselves, or due to any misleading statement included therein. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



The aforementioned translated U.S. dollar financial statements have been prepared on the basis of nominal NIS historical cost. Disclosure of the effect of the changes in the general purchasing power of the Israeli currency in the financial statements as stated in the Opinions of the Institute of Certified Public Accountants in Israel, has not been included in the above mentioned statements.



Full financial statement disclosures and statements of cash flows that  are as required according to generally accepted accounting principles have not been presented and as such, the translated U.S. dollar financial statements mentioned above are to be read in conjunction with the primary annual audited financial statements of the Company, as of December 31, 2002 and their accompanying Notes.



In our opinion, except for the effects of the matters discussed in the preceding paragraphs,  the translated U.S. dollar financial statements referred to above present fairly, in all material respects, the translated U.S. dollar financial position of the Company as of December 31, 2002 and 2001, and the related translated U.S. dollar results of its operations for each of the three years in the period ended December 31, 2002, in conformity with generally accepted accounting principles in Israel. As applicable to the Company's financial statements, accounting principles generally excepted in the United Sates and in Israel are substantially identical in all material respects.



Also, in our opinion, the translation of the aforementioned nominal figures into U.S. dollars was made in accordance with the principles set forth in SFAS 52, see Note 2.



The aforementioned financial statements are designated solely for you as shareholders of the Company, are not to be published or delivered to others.





|Tel-Aviv, Israel  |  | 
|----------------- |  | 
|February 16, 2003 |  | 



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| |  | Kost Forer Gabbay & Kasierer
3 Aminadav St.              
Tel-Aviv 67067, Israel |  | Phone:   972-3-6232525
Fax:     972-3-5622555
| |  | -------------------------------------------------------------------------------- |  | ---------------------------------------------





Messrs. Ampal Ltd.



|Re: | Financial statements of Shmay-Bar (I.A) 1993 Ltd.
|--- | -------------------------------------------------
|    | ("the Company") translated into U.S. dollars     



As you know, the Company publishes in Israel financial statements in NIS adjusted to the changes in the Consumer Price Index, in accordance with Statements of the Institute of Certified Public Accountants in Israel. These primary annual financial statements of the Company for the years 2002 and 2001, which were audited by us, and on which we expressed our opinion on February 16, 2003, have been provided to you.



We have audited the accompanying translated U.S. dollar balance sheets of the Company as of December 31, 2002 and 2001, and the related translated U.S. dollar statements of income for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility  of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with generally accepted auditing standards in Israel and the United States, including those prescribed by the Israeli Auditors Regulations (Mode of Performance) (Israel), 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, either originating within the financial statements themselves, or due to any misleading statement included therein. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



The aforementioned translated U.S. dollar financial statements have been prepared on the basis of nominal NIS historical cost. Disclosure of the effect of the changes in the general purchasing power of the Israeli currency in the financial statements as stated in the Opinions of the Institute of Certified Public Accountants in Israel, has not been included in the above mentioned statements.



Full financial statement disclosures and statements of cash flows that  are as required according to generally accepted accounting principles have not been presented and as such, the translated U.S. dollar financial statements mentioned above are to be read in conjunction with the primary annual audited financial statements of the Company, as of December 31, 2002 and their accompanying Notes.



In our opinion, except for the effects of the matters discussed in the preceding paragraphs,  the translated U.S. dollar financial statements referred to above present fairly, in all material respects, the translated U.S. dollar financial position of the Company as of December 31, 2002 and 2001, and the related translated U.S. dollar results of its operations for each of the three years in the period ended December 31, 2002, in conformity with generally accepted accounting principles in Israel. As applicable to the Company's financial statements, accounting principles generally excepted in the United Sates and in Israel are substantially identical in all material respects.



Also, in our opinion, the translation of the aforementioned nominal figures into U.S. dollars was made in accordance with the principles set forth in SFAS 52, see Note 2.



The aforementioned financial statements are designated solely for you as shareholders of the Company, are not to be published or delivered to others.





|Tel-Aviv, Israel  |  | KOST FORER & GABBAY                    
|----------------- |  | ---------------------------------------
|February 16, 2003 |  | A Member of Ernst & Young International



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| |  |  |  | 
| |  |  |  | 

AUDITORS REPORT

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF

TRINET INVESTMENTS IN HIGH-TECH LTD.

We have audited the accompanying balance sheets of Trinet Investments in High-Tech Ltd. (the Company) as of December 31, 2002 and 2001, and the related statements of operations and changes in shareholders deficiency for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Companys Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

During 2002 the company ceased its operations.

In our opinion, the aforementioned financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and 2001, and the results of its operations and changes in shareholders deficiency for each of the three years in the period ended December 31, 2002, in accordance with generally accepted accounting principles in Israel.

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

The financial information presented in U.S. dollars and in accordance with generally accepted accounting principles in the United States is based on nominal historical amounts in Israeli currency and is presented in Note 8 to the financial statements.





Brightman Almagor & Co.

Certified Public Accountants

Tel Aviv, March 13, 2003



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# 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 15th day of March, 2005.

| |  | AMPAL-AMERICANISRAEL 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 15, 2005
|------------------------------------------------- | ----------------------------------- | --------------

|/S/ JACK BIGIO
Jack Bigio | President & CEO - Director | March 15, 2005
|--------------------------------------- | -------------------------- | --------------

|/S/ LEO MALAMUD
Leo Malamud | Director | March 15, 2005
|----------------------------------------- | -------- | --------------

|/S/ DR. JOSEPH YERUSHALMI
Dr. Joseph Yerushalmi | Director | March 15, 2005
|------------------------------------------------------------- | -------- | --------------

|/S/ YEHUDA KARNI
Yehuda Karni | Director | March 15, 2005
|------------------------------------------- | -------- | --------------

|/S/ EITAN HABER
Eitan Haber | Director | March 15, 2005
|----------------------------------------- | -------- | --------------

|/S/ MENAHEM MORAG
Menahem Morag | Director | March 15, 2005
|--------------------------------------------- | -------- | --------------

|/S/ IRIT ELUZ
Irit Eluz | CFO, Senior Vice President-
Finance  and Treasurer
(Principal Financial Officer) | March 15, 2005
|------------------------------------- | -------------------------------------------------------------------------------- | --------------

|/S/ GIORA BAR - NIR
Giora Bar-Nir | VP Accounting & Controller     
(Principal Accounting Officer) | March 15, 2005
|----------------------------------------------- | -------------------------------------------------------------- | --------------

80

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