<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   -----------

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

                                   -----------

(MARK ONE)

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

For the fiscal year ended December 31, 1998

                                       OR

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

For the transition period from ________________ to _______________

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

            NEW YORK                                         13-0435685
 (State or Other Jurisdiction of                          (I.R.S. Employer
   Incorporation or Organization)                        Identification No.)

1177 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK                  10036 
(Address of Principal Executive Offices)                      (Zip Code)

       Registrant's telephone number, including area code: (212) 782-2100.
           Securities registered pursuant to Section 12(b) of the Act:

               TITLE OF EACH CLASS                    NAME OF EACH EXCHANGE
               -------------------                     ON WHICH REGISTERED
                                                       -------------------
Class A Stock                                       American Stock Exchange
Warrants to purchase shares of Class A  Stock       American Stock Exchange

           Securities registered pursuant to Section 12(g) of the Act:
                                  Class A Stock
                    4% Cumulative Convertible Preferred Stock
                  6 1/2% Cumulative Convertible Preferred Stock
                               (Titles of Classes)

                                   -----------

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

Yes  _X_    No  _ _

     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_.

     The number of shares outstanding of the issuer's Class A Stock, its only
authorized common stock, is 24,114,062 (as of March 18, 1999).

     The aggregate market value of the voting stock held by non-affiliates of
the registrant is 27,071,325 (as of March 18, 1999).


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<PAGE>   2


                           ANNUAL REPORT ON FORM 10-K
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
                      OF AMPAL-AMERICAN ISRAEL CORPORATION
                                     PART I

ITEM 1. BUSINESS

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

     For industry segment financial information and financial information about
foreign and domestic operations, see Note 13 to the Company's consolidated
financial statements included elsewhere herein.

     The Company acquires interests in businesses located in the State of Israel
or that are Israel-related. The Company seeks to invest in companies which have
long-term growth potential. The Company is involved in a broad cross-section of
Israeli companies engaged in various fields including high technology and
communications, hotels and leisure-time, real estate, finance, energy
distribution and industry. The Company generally participates in the management
of its investee companies through representation on boards of directors and
otherwise.

     In order to identify investment opportunities in the Israeli market, the
Company is active in those sectors where it believes that the Israeli market has
a competitive advantage in the global market. Currently, the Company has
identified the Israeli high-technology and communications sector as having
attained world-class stature. As a result, in January, 1998 the Company made the
largest investment in the Company's history, an investment of $110 million for
the purchase of a one-third interest (subsequently reduced to 25%) in the shared
networks operations of Motorola Communications Israel, Ltd. ("Motorola Israel").
Furthermore the Company invested an additional amount of approximately $7.3
million during 1998 in other entities in the high-technology and communications
sector. These new investments represent the Company's principal investments in
1998 as well as a cornerstone in the Company's strategic planning for the
future. The Company expects to continue its activities in this sector.

     The Company is constantly attempting to identify and take advantage of
other Israeli business sectors which have attained world-class stature.
Similarly, the Company constantly evaluates its investments in order to
determine which investments do not meet these standards or do not have
attractive growth potential. The Company will then attempt to divest itself of
such investments.

     The Company competes for investment opportunities with other established
and well-capitalized investing entities. There can be no assurance that suitable
opportunities will continue to be available to the Company at valuations and on
terms which are favorable.


<PAGE>   3



     Listed below by industry segment are the Company's most significant
investees, the principal business of each and the percentage of equity owned,
directly or indirectly, by Ampal. The table below also indicates whether the
investee is listed on the American Stock Exchange ("AMEX"), Nasdaq Stock Market
("NASDAQ") or the Tel Aviv Stock Exchange ("TASE"). For further information with
respect to the more significant investee companies, see below. For additional
information concerning the investee companies, previous 10-K forms of Ampal are
herein incorporated by reference.

<TABLE>
<CAPTION>
                                                                                                                     PERCENTAGE
                                                                                                                        AS OF
                       INDUSTRY SEGMENT                                        PRINCIPAL BUSINESS                 DECEMBER 31, 1998
                       ----------------                                        ------------------                 -----------------
<S>                                                           <C>                                                      <C>
HIGH TECHNOLOGY AND COMMUNICATIONS
   A.T.V. Broadcasting Ltd.--------------------------         Arabic Cable Channel                                     24.9
   Breezecom Ltd.------------------------------------         Wireless Local Area Network                               8.3
   Clalcom Ltd.--------------------------------------         Communications                                            0.7
   Comfy Interactive Movies Ltd.(TASE)---------------         Computer Technology for Children                          2.2
   Compugen Ltd.-------------------------------------         Bioinformatics                                            1.8
   Fundtech Ltd. (NASDAQ: "FNDTF")-------------------         Banking Software                                          1.5
   Medco Electronics Systems Ltd.--------------------         Medical Device for Cardiac Problems                      15.4
   MIRS Communication Company Ltd.-------------------         Wireless Communications Service Provider                 25.0
   M-Systems Flash Disk Pioneers Ltd.
    (NASDAQ: "FLSHF")--------------------------------         Data Storage Material                                     0.5
   Mutek Solutions Ltd.------------------------------         Develops Software for Servers                             8.8
   NKO, Inc.-----------------------------------------         Facsimile Transmission                                    3.0(1)
   Ortek Ltd.----------------------------------------         Electro-optical Devices                                  24.9
   PowerDsine Ltd.-----------------------------------         Telecommunications Components                            11.9
   Qronus Interactive Israel (1994) Ltd.-------------         Software Quality Products                                 9.5
   Shellcase Ltd.------------------------------------         Packaging Process for Semiconductor Chips                11.0
   Shiron Satellite Communications (1996) Ltd.-------         Satellite Modems and Fast Internet Access                12.0
   Smartlight Ltd.-----------------------------------         X-Ray Film Digital Viewer                                 9.0
   Trinet Venture Capital Ltd..----------------------         Venture Capital Fund                                     50.0
       Logal Software and Educational
        Systems Ltd. (NASDAQ: "LOGLF")---------------         Educational Software                                      2.9(2)
       NetformX, Ltd.--------------------------------         Computer Systems, Software and Hardware                  21.0(2)
       Peptor Ltd.-----------------------------------         Pharmaceutical Products                                   0.6(2)
       Smart-Link Ltd.-------------------------------         Multimedia                                               18.3(2)
   Unic View Ltd.------------------------------------         Projection Television System                              5.9
   VisionCare Ophthalmic Technologies Ltd.-----------         Advanced Optical Products                                 5.1
   XaCCT Technologies Ltd.---------------------------         TCP/IP Network Software                                  18.4

REAL ESTATE
   Ampal Development (Israel) Ltd.-------------------         Holding Company and Commercial Real Estate              100.0
   Ampal Financial Services Ltd.---------------------         Holding Company and Commercial Real Estate              100.0
   Ampal (Israel) Ltd.-------------------------------         Holding Company and Commercial Real Estate              100.0
   Ampal Realty Corporation--------------------------         Commercial Real Estate                                  100.0
   Bay Heart Limited---------------------------------         Shopping Mall Owner/Lessor                               37.0
   Etz Vanir Ltd. and Yakhin Mataim Ltd.-------------         Citrus Groves                                            50.0(3)
   Frenkel Lefkovitz & Co.---------------------------         Real Estate                                              20.0
   Nir Ltd.------------------------------------------         Holding Company and Commercial Real Estate               99.9
   Ophir Holdings Ltd. ("Ophir")---------------------         Holding Company                                          42.5
       Combox Ltd.-----------------------------------         Data Transmission Systems                                 8.0(4)
       Courses Investment in Technology Ltd.---------         Venture Capital Fund                                      4.6(4)
       Elpas Ltd.------------------------------------         Products Based on Data Communication Technologies         4.4(4)
       Industrial Buildings Corporation
        Ltd. (TASE)----------------------------------         Industrial Real Estate                                    5.6(4)
       Memco Software Ltd.(NASDAQ: "MEMCF")----------         Computer Security Software Products                       3.9(4)
       Nogatech Inc.---------------------------------         Video Communication Compression Technology                3.0(4)
       Romidot Ltd.----------------------------------         Optical Checking Instruments                              4.0(4)
       Shmey-Bar Group-------------------------------         Commercial Real Estate                                    7.1(4)
       Soliton Ltd.----------------------------------         Internet Safeguard Program                                7.1(4)

ENERGY DISTRIBUTION
   Granite Hacarmel Investments Ltd. (TASE)----------         Distribution of Refined Petroleum Products               19.1

HOTELS AND LEISURE-TIME
   Coral World International Limited-----------------         Underwater Observatories and Marine Parks                50.0
   Country Club Kfar Saba Limited--------------------         Country Club Facility                                    51.0
   Hod Hasharon Sport Center (1992)
    Limited Partnership------------------------------         Country Club Facility                                    50.0
   Moriah Hotels Ltd.--------------------------------         Hotel Chain                                              46.0(5)

FINANCE AND OTHER HOLDINGS
   Am-Hal Ltd.---------------------------------------         Senior Citizen Facilities                                50.0
   Bank Leumi Le'Israel Ltd.-------------------------         Israeli Commercial Bank                                   0.9
   Epsilon Investment House Ltd.---------------------         Investment House                                         20.0
   Renaissance Israel--------------------------------         Investment Fund                                          15.0
</TABLE>


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<PAGE>   4


<TABLE>
<CAPTION>
                                                                                                                     PERCENTAGE
                                                                                                                        AS OF
                       INDUSTRY SEGMENT                                        PRINCIPAL BUSINESS                 DECEMBER 31, 1998
                       ----------------                                        ------------------                 -----------------
<S>                                                           <C>                                                      <C>
INDUSTRY
   Carmel Container Systems Limited
    (AMEX: "KML")------------------------------------         Packaging Materials and Carton Production                20.7
   M.D.F. Industries Ltd.----------------------------         Medium Density Fiber Products                            50.0
   Paradise Industries Ltd.--------------------------         Mattresses and Fold-out Beds                             85.1
</TABLE>


-----------
(1)  As of January 1999, the company no longer has an interest in NKO, Inc.

(2)  As of December 31, 1998, Trinet Venture Capital Ltd., held the following
     percentage interests:

<TABLE>
<S>                                                                              <C> 
              Logal Software and Educational Systems Ltd.--------------          5.7%
              NetformX Ltd.--------------------------------------------         29.6%
              Peptor Ltd.----------------------------------------------          1.2%
              Smart-Link Ltd.------------------------------------------         35.2%
</TABLE>

     The Company's percentage of the above companies reflects 50% of Trinet's
     ownership plus any direct holdings.

(3)  Please refer to "Legal Proceedings."

(4)  As of December 31, 1998, Ophir Holdings Ltd. held the following percentage
     interests:

<TABLE>
<S>                                                                             <C>  
              Combox Ltd.----------------------------------------------         18.8%
              Courses Investment in Technology Ltd.--------------------          5.0%
              Elpas Ltd.-----------------------------------------------         10.4%
              Industrial Buildings Corporation Ltd.--------------------         13.3%
              Memco Software Ltd.--------------------------------------          9.3%
              Nogatech, Inc.-------------------------------------------          7.1%
              Romidot Ltd.---------------------------------------------          9.4%
              Shmey-Bar (I.A.) 1993 Ltd.,
              Shmey-Bar (T.H.) 1993 Ltd. and
              Shmey-Bar Real Estate 1993 Ltd.--------------------------         16.7%
              Soliton Ltd.---------------------------------------------         16.6%
</TABLE>

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

(5)  Please refer to "Recent Developments" and "Moriah Hotels Ltd."

SIGNIFICANT RECENT DEVELOPMENTS SINCE BEGINNING OF LAST FISCAL YEAR

     On January 25, 1999, the Company accepted a tender from Koor Tourism
Enterprises (which tendered, jointly with the Sheraton International chain) for
the acquisition of the Radison Moriah Hotels chain ("Moriah"), the Company's
46%-owned affiliate, for $37.5 million. This transaction was approved by
Israel's Anti-Trust Commissioner. If the aforementioned transaction is
consummated, the Company will record a gain on sale in the amount of
approximately $12.4 million ($8 million, net of income taxes). In the event that
Moriah distributes dividends prior to the completion of the sale, the sales
price will be adjusted by the amount of the dividends received.

     Hapoalim approached Ampal to commence netotiations regarding the potential
purchase by Ampal and its subsidiaries of Hapoalim's entire holdings in Ampal.
In connection with the proposed transaction, Ampal's Related Party Transactions
Committee approved on March 22, 1999 to continue the negotiations with Hapoalim
to acquire the entire Hapoalim holdings in Ampal in exchange for consideration
consisting of cash and certain real estate properties currently leased to
Hapoalim.

                                       3
<PAGE>   5

HIGH TECHNOLOGY AND COMMUNICATIONS

     BREEZECOM LTD. ("BREEZE")

     In June 1995, the Company invested $1 million to acquire a 13.6% equity
interest in Breeze. The Company's interest was diluted to 8.3% in 1997 due to
the issuance of shares by Breeze.

     Breeze, formerly known as Lannair, Ltd., is an Israeli company which
develops, manufactures and markets wireless local area networks ("LANS") for
computers and wireless local loop network (wwl) using license-free, spread
spectrum radio technology. Breeze's product strategy focuses on two product
lines, wireless LANS for personal computers and notebooks and wireless remote
bridges and modems. Breeze has a distribution network with more than 100
distributors in 45 countries. It has a United States subsidiary which develops,
sells and provides support to customers on the American continent.

     Breeze tripled its sales during 1998 to $32 million.

     Compugen Ltd. ("Compugen")

     In 1998 the Company invested $1 million for a 1.8% equity interest in
Compugen an Israeli bioinformatics corporation which engages in the development
of algorithms and models for the interpretation of biological processes. Ampal's
investment was part of an approximately $15 million round of financing of
Compugen by Clal Biotechnology Industries Ltd., Evergreen and Hapoalim
Investments Ltd. ("INV"), based on a company valuation of $44 million.

     FUNDTECH LTD. ("FUNDTECH")

     In April, 1997, Ampal purchased a 2.2% interest in Fundtech, for a purchase
price of $750,000. Fundtech is an Israeli company which designs, builds and
sells payment systems to financial institutions and their customers, using
advanced technology and innovative human engineering. In March 1998, Fundtech
completed a public offering of its shares. As a result of the offering, the
Company's equity interest in Fundtech was reduced to 1.5%.

     MEDCO ELECTRONICS SYSTEMS LTD. ("MEDCO")

     The Company purchased a 15.4% interest in Medco for $598,000. Medco
completed the development of the FEMO, its fetal monitoring device. The FEMO
enables the pediatrician to view a fetal ECG and is currently the only device
available for such purpose. During 1998, Medco started selling the device for
research purposes and has filed for FDA approval. Medco was unable to raise the
capital required for operating expenses, as a result, it has ceased operations,
and shareholders are seeking a buyer for the company or its technology. As a
result of the forgoing the Company wrote off this investment.



                                       4
<PAGE>   6

     MIRS COMMUNICATION COMPANY LTD ("MIRS")

     On January 22, 1998 (the "Closing Date"), Ampal Communications, Inc.
("Communications"), a Delaware corporation and a wholly-owned subsidiary of
Ampal, completed its purchase of a one-third interest (subsequently reduced to
25%) in the assets of the shared networks operation ("SNO") of Motorola Israel,
an Israeli corporation, for a purchase price of $110 million. The purchase was
made pursuant to a Purchase and Sale Agreement, dated January 5, 1998, between
Motorola Israel and Communications. The Purchase and Sale Agreement, as amended,
is referred to as the "Purchase Agreement." In addition to the purchase price,
Communications paid Motorola Israel $280,000 for interest on the purchase price
that accrued between the date of the Purchase Agreement and the closing of the
transaction.

     In March 1998, Communications transferred its interest to a limited
partnership (the "Partnership"). A wholly-owned Israeli subsidiary of
Communications (the "General Partner") is the general partner of the Partnership
and owns 75.1% of the Partnership. The limited partners of the Partnership
purchased their interests in the Partnership from the Partnership and include
(i) an entity owned by Daniel Steinmetz and Raz Steinmetz (directors of Ampal
and the controlling persons of Ampal's principal shareholder), which acquired a
9.1% interest in the Partnership for $10 million, (ii) Hapoalim, which acquired
a 7.45% interest in the Partnership for $8.195 million, (iii) an unrelated third
party mezzanine fund, which acquired a 7.45% interest in the Partnership for
$8.195 million, and (iv) an entity owned by Dr. Yehoshua Gleitman, Ampal's Chief
Executive Officer, which purchased a .9% interest for $1 million. In addition to
the purchase price, the limited partners also reimbursed the Company for their
pro rata share of the expenses incurred by the Company in connection with the
original purchase from Motorola Israel (including interest from the date of the
Purchase Agreement until the purchase date of the limited partnership
interests).

     In 1998, MIRS focused its efforts on establishing its position as a radio
communications operator which provides its customers with an integrated
communications solution and the widest variety of communication services at the
highest level of quality. In spite of the difficult economic environment in the
Israeli market and the accelerated competition with cellular operators, MIRS
managed to double its customer base in 1998 to more than 100,000 subscriber
units.

     The revenue for the year reached approximately $100 million and MIRS
managed to achieve its goals as formulated in its business plan.

     In anticipation of competition in 1999, MIRS re-aligned its sales force
dividing it into two parts: the direct and the indirect. Both parts of the sales
force aim to retain and cultivate relationships with the company's customers, to
further increase sales and to reduce churn rate.

     1998 was a marketing breakthrough year for MIRS. An intensive effort was
made to penetrate the Israeli market. Initiatives included the i1000 (Leader)
advertising campaign; the marketing of a wide range of service packages to meet
the needs of the business sector; the introduction of value added services such
as Business Networks, Direct Dialing, Hebrew Short Messages Service and Split
Bill for customers who wish to separate their business and private expenses and
offering leasing packages.

     In 1998 the Customer Retention Center served as the primary contact for
efficient customer service and the Telephone Collection Center was established
to streamline the collection process.

     Two new delivery methods were implemented in 1998: direct delivery and
immediate delivery from the salesperson's trunk. Successful implementation
resulted in improved levels of customer satisfaction. The new On-Line Customer
Credit Approval Center improved the order approval process and reduced cycle
time.

     In 1999 MIRS will further enhance its positioning as the best-in-class
integrated system, which provides the ultimate solution (private calls, group
calls, telephone SMS and data) for the business and executive accounts sectors.



                                       5
<PAGE>   7

     In order to further improve system performance, MIRS will continue to
invest in its infrastructure to provide better system coverage. MIRS is
developing a second system control center which will provide full backup for the
dispatch service in case of a major outage.

     The overall share of the Company in dividends from the two MIRS entities
was $1.2 million, out of which $900,000 were declared and paid in March, 1999.

     1999 is expected to be the beginning of the Data Era. Anticipating demand,
the infrastructure required for packet data services will be installed. Packet
data is the new generation of circuit data which has the capacity to transmit
data at very high rates. Data applications will include horizontal applications
such as e-mail and internet as well as vertical applications designed to meet
customer needs.

     MEMCO SOFTWARE LTD. ("MEMCO")

     The Company owns a 3.9% interest in Memco through Ophir. Memco, which
underwent an initial public offering in October 1996, develops and markets
comprehensive information security products designed to protect and manage
access to critical information assets and system resources in distributed
computing environments.

     On August 13, 1998, a merger agreement was signed between Memco and
Platinum Technology Inc. ("Platinum"), a U.S. corporation which was a
shareholder of Memco. Under that agreement, Memco will become wholly owned by
Platinum and Platinum will issue its shares to Memco shareholders, at a ratio of
0.836 Platinum share for one share of Memco. The merger received the required
authorities' approval.

     As part of the merger agreement, Memco shareholders (including Ophir) have
undertaken not to sell Memco shares until the merger procedures are completed.

     Memco's Shares are listed on NASDAQ under the symbol MEMCF.

     MUTEK SOLUTIONS LTD. ("MUTEK")

     In October 1996, the Company purchased a 7.2% interest in Mutek for
$750,000. Mutek, which was founded in 1996, is a developer of innovative
software development tools. Mutek is active in the fields of code
instrumentation, abstract interpretation, semantic analysis and others. Its
products include BugTrapperTM, an automatic tracing system, AutoParTM, a tool
for transforming sequential programs written in FORTRAN-77 into parallel
programs with explicit message passing directions, and BugPredictorTM, a
powerful tool for static debugging.

     The Company invested $700,000 in Mutek in the second quarter of 1998,
increasing its interest to 8.8%. The Company decided to write down its
investment in Mutek by $700,000 in 1998.

     NETFORMX, LTD. ("NETFORMX") (Formerly ImageNet Ltd.)

     The Company has a 21% equity interest directly and indirectly through
Trinet and Ophir in NetformX. NetformX develops and markets the award winning
CANE(R) family of network design, analysis and simulation tools. CANE, the
emerging standard in Computer Aided Network Engineering, is the only integrated,
end-to-end, multi-layer, network design tool on the market. 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 a highly
sophisticated package built from the ground up to resolve network chaos and
manage the accelerating pace of network change while reducing network equipment,
consulting and staff costs.



                                       6
<PAGE>   8

     NKO, INC. ("NKO")

     In June 1997, the Company purchased a 3% interest in NKO for $1 million.
NKO is developing a unique "fax-over-data" network technology for long distance
fax transmission services. NKO is a subsidiary of Clalcom Ltd., an Israeli
telecommunication company. The Company's share in NKO was sold during January
1999 for $1.1 million.

     ORTEK LTD. ("ORTEK")

     In September 1997, the Company acquired a 24.99% interest in Ortek for
$500,000. Ortek is a developer and manufacturer of electro-optical devices and
systems for the military and civilian markets. Ortek is a subsidiary of ELOP
Electro-Optical Industries Ltd., the industry leader in electro-optics in
Israel. A related party of Ampal also owns a 24.99% interest in Ortek. In 1998,
the Company wrote down its investment in Ortek.

     POWERDSINE LTD. ("POWERDSINE")

     In August 1997, the Company invested $2 million to acquire 12.5% of
PowerDsine, an Israeli company specializing in the development, manufacture,
marketing and sale of unique, innovative modules and components for the
telecommunications industry. PowerDsine recently introduced its first line of
off-the-shelf products - telephone ring generators - and is marketing them in
North America, Europe and Asia. Additional products are currently being
designed. During 1998 the Company invested an additional amount of $1 million by
way of exercising an option granted to the company during the initial purchase
of PowerDsine's shares. The Company decided not to exercise its full preemptive
rights in the last round of financing of PowerDsine and therefore its interest
in PowerDsine was reduced to 11.9%.

     QRONUS INTERACTIVE ISRAEL (1994) LTD. ("QRONUS")

     In 1994, Qronus was established to develop and sell a non-intrusive
automated software testing tool embedded and non-standard systems. The key
target markets for Qronus' technology are medical systems, industrial automation
and instrumentation, point-of-sale and other non-standard client-server
applications, telecommunications, military and aerospace. In the first quarter
of 1998, Qronus raised $4 million in a private offering and is negotiating a
long-term strategic relationship with a major point of sale manufacturer.

     In the first quarter of 1998, the company invested an additional $325,000
in Qronus. The Company, as of December 31, 1998, owned a 9.5% interest in
Qronus.

     SHELLCASE LTD. ("SHELLCASE")

     In November 1997, The Company purchased an 11% interest in Shellcase for a
purchase price of $2,000,000. Shellcase has developed a packaging process for
computer chips. These packages are the smallest available to the computer
industry.

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

     In November 1997, the Company purchased a 12% interest in Shiron for a
purchase price of $1,250,000. Shiron is developing a line of satellite modems
which achieve high data rates, designed to answer the requirements of satellite
data and voice applications such as rural telephony, video conferencing and
other applications. In addition, Shiron is developing a two-way fast internet
access via satellite systems.

     Shiron's system employs an additional up-link channel while competing
systems provide only download capability. Shiron completed its initial phase of
product development in 1998 and anticipates commercial roll-out in 1999.

     SMARTLIGHT LTD. ("SMARTLIGHT")

     In 1998, the Company invested $2.5 million to acquire a 9% interest in
SmartLight. SmartLight is a manufacturer and marketer of computerized x-ray
viewers. SmartLight's viewers provide physicians and technicians with images
which are up to 50% richer in detail.



                                       7
<PAGE>   9

     SmartLight anticipates significant growth in sales in 1999.

     SMART-LINK, LTD. ("SMART-LINK")

     In 1995, Trinet invested $900,000 for a 51% interest in Smart-Link Ltd., a
developer and marketer of multimedia products. In 1996, Trinet increased its
holdings in Smart-Link to 60.1% through an investment of an additional $600,000.
Between November 1996 and April 1997, other investors invested or committed to
invest $4 million in Smart-Link. An additional $3 million was invested in
Smart-Link in the fourth quarter of 1998. The Company and INV participated in 
exercising Trinet's preemptive rights. The Company's current equity, including
its respective holding through Trinet, is 18.3%.

     TRINET VENTURE CAPITAL LTD. ("TRINET")

     In February 1994, the Company and INV, established Trinet, a venture
capital fund for investments in high-technology ventures in Israel including
start-up entities. Each of the Company and INV had committed to invest up to
$2.5 million in Trinet. In 1996, the commitment was increased by $4 million ($2
million each).

     Between 1995 and 1998 Trinet invested in several high-technology companies
including Netformx and Smart-Link (as aforementioned), Logal Software and
Educational Systems Ltd., Nulan Technologies Ltd., Peptor Ltd., and Comfy
Interactive Movies Ltd., the latter of which was sold during 1998.

     Since the amounts committed by the shareholders were fully invested, the
Chief Executive Officer of Trinet resigned during the first quarter of 1998, and
Trinet's holdings are currently being managed by Ophir. See "Ophir Holdings
Ltd."

     UNIC VIEW LTD. ("UNIC VIEW")

     In March 1997, the Company invested $1 million to acquire a 7.3% interest
in Unic View. The Company did not participate in Unic View's last round of
financing, resulting in its equity in Unic View being reduced to 5.9%. Unic View
is a manufacturer and marketer of a liquid screen display projector for video,
large-screen television and computer projection systems and a developer of a new
projector engine for home use.

     VISIONCARE OPHTHALMIC TECHNOLOGIES LTD. ("VISIONCARE")

     In March 1997, the Company invested $250,000 to acquire a 5.1% interest in
VisionCare. VisionCare is developing and marketing opthalmic implantable
products that give patients better, more natural visual function. VisionCare's
first product is a patented intraoccular telescopic lens for treatment of
macular degeneration. Initial clinical trials have been successful and
VisionCare's production facility has received ISO-9001 certification. During the
last quarter of 1998, VisionCare met all its milestones, therefore the Company
and other first round investors completed the commitment to invest in
VisionCare. The Company's share in such investment was $279,000. Visioncare is
currently negotiating a private placement based on the company's valuation of
more than $20 million.

         XACCT TECHNOLOGIES LTD. ("XACCT")

     Ampal's original investment in XaCCT, made in June 1997, was $400,000 for
an 9.8% interest. On March 2, 1998, Ampal invested an additional $838,000 and
increased its equity interest to 19.3%. By the end of 1998, the Company invested
an additional amount of $1.3 million which included its respective preemptive
rights during the third round of financing. Participating in this $7.5 million
third round of financing were two U.S. based venture capital funds which
enhances the Company's profile in the United States. As a result of the third
round financing the Company's interest in XaCCT was reduced to 18.4%. XaCCT has
developed billing, auditing and accounting software for TCP/IP networks. This

                                       8
<PAGE>   10

software allows such networks to generate reports of networks transactions and
services. XaCCT has successfully installed its software at 15 sites worldwide,
as beta-testing sites. XaCCT was selected to be among the top 25 startups of
1998 by Data Communication Magazine.

REAL ESTATE

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

     AMPAL DEVELOPMENT (ISRAEL) LTD. ("AMPAL DEVELOPMENT"), NIR LTD. ("NIR") AND
     AMPAL FINANCIAL SERVICES LTD. ("AMPAL FINANCIAL") (TOGETHER, THE "HOLDING
     COMPANIES")

     Ampal Development, Nir and Ampal Financial, each of which is wholly-owned
by the Company, are engaged in the business of financing acquisitions by the
Company and holding and leasing commercial real estate in Israel. Prior to 1989,
these companies had acted primarily as lenders, and their financing activities
were the principal activities of the Company. In 1990, the Holding Companies
sold substantially all their loan portfolios to Bank Hapoalim B.M. ("Hapoalim"),
and they relinquished their banking licenses. The Holding Companies still
service certain loans made by them prior to their ceasing lending activity which
are guaranteed by Hapoalim.

     It has been reported in the media that Israeli banks are the subject of
allegations that they engaged in improper business practices regarding lending.
The lending practices engaged in by the Holding Companies were substantially
similar to the lending practices of the other Israeli banks. Two claims, one in
the amount of 3.6 million New Israeli Shekels ("NIS" or "shekels")
(approximately $865,000) and another one in the amount of NIS 4.0 million
(together with Hapoalim) have already been filed with the District Court in Tel
Aviv. However, to the best of the Company's knowledge, the Company's
subsidiaries, which operated as banking institutions, acted within the law and
in accordance with the procedures and customs in effect at the time. On November
19, 1998, the District Court of Tel Aviv ruled that the statute of limitations
applies to the majority of the first plaintiff's claim, and thereby rejected
same. The plaintiff filed an appeal with the High Court of Appeals, and withdrew
the remainder of its claim until the Appellate Court ruling. The Company expects
to continue to vigorously defend the two claims. The Company believes that its
exposure to additional such claims is close to nothing due to the fact that its
banking activity is subject to the statute of limitations, and the fact that the
courts in Israel, as in the case of the claim against the Company as described
above, do not support claims concerning events that happened more than seven
years ago.

     Ampal Development owns five commercial properties located in Israel
aggregating approximately 37,000 square feet for which it received approximately
$1.4 million in rent for 1998. Four of these properties are net leased to
Hapoalim. Nir owns four commercial properties located in Israel aggregating
approximately 18,000 square feet for which it received approximately $.5 million
in rent in 1998. Three of these properties are net leased to Hapoalim. Ampal
Financial owns two commercial properties located in Israel aggregating
approximately 7,000 square feet for which it received approximately $.6 million
in rent in 1998. Both of these properties are net leased to Hapoalim.

     The Holding Companies hold interests in other companies discussed elsewhere
in this Report and also make loans to these and other investees in furtherance
of their businesses.

     Ampal Development issued debentures which are publicly traded on the TASE.
An aggregate of approximately $21.2 million of these debentures were outstanding
as of December 31, 1998. Ampal Development has deposited with Hapoalim funds
sufficient to pay all principal and interest on these debentures.



                                       9
<PAGE>   11

     AMPAL INDUSTRIES (ISRAEL) LTD. ("AMPAL INDUSTRIES")

     Ampal Industries, a wholly-owned subsidiary of Ampal, which holds interests
in various investee companies described elsewhere in this Report, acquired in
1997 a long-term lease interest in one-half of a commercial building located in
Migdal Ha'emek. In 1998, it received approximately $.1 million in rent for this
property.

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

     Ampal (Israel), a wholly-owned subsidiary of Ampal, owns an approximately
57,000 square foot commercial property located in Tel Aviv which houses its
principal offices. A portion of this property is net leased to Hapoalim and
another portion is net leased to Moriah. Ampal (Israel) also acts as a holding
company for other investments discussed elsewhere in this Report.

     AMPAL REALTY CORPORATION ("AMPAL REALTY")

     In June 1995, Ampal Realty purchased real property on which an
approximately 290,000 square foot office building is located, for approximately
$45 million. The building is located at 800 Second Avenue, New York, New York.
The building is 43.9%-occupied by the Consulate of the Government of Israel in
New York and many other Israeli government offices.

     On December 12, 1996, the building was converted into an office
condominium. Following the conversion, on January 31, 1997, the Government of
Israel purchased a condominium unit consisting of floors 10 through 18 from
Ampal Realty for a purchase price of $31 million.

     The original purchase by Ampal Realty was partially financed by a loan of
$30 million from Hapoalim at an interest rate of LIBOR plus 1% which was to have
matured on the initial expiry date of June 28, 1996. As originally contemplated,
Ampal Realty requested, and Hapoalim agreed, to extend the repayment of the
balance of the loan until June 28, 2000 with quarterly principal payments
commencing March 28, 1997. Ampal guaranteed $20 million of this loan. Concurrent
with the conversion, Ampal Realty repaid $15 million of the outstanding
principal of the loan, the maturity date of the loan was set at February 28,
1998, the interest was set at LIBOR plus .50% and Ampal's guarantee was reduced
to $10 million.

     As of February 28, 1999, the maturity date for repayment of the $15 million
of outstanding principal was extended to May 31, 1999, the interest rate was set
at LIBOR plus .75% and Ampal agreed to guarantee all outstanding obligations.

     Currently, 88% of the space owned by Ampal Realty in the building is
occupied.

     During 1998, Ampal Realty recorded approximately $3.9 million in rent.

     During 1998, Ampal completed a major portion of the proposed building
renovation including installation of a new air-conditioning system and new
elevators.

     Ampal Realty intends to offer its remaining interests in the building for
sale or long term lease.

     BAY HEART LIMITED ("BAY HEART")

     Bay Heart was established in 1987 to develop and lease a shopping mall (the
"Mall") in the Haifa bay area. Haifa is the third largest city in Israel. The
Mall, which opened in May 1991, is a modern three-story facility with
approximately 280,000 square feet of rentable space. The Mall is located at the
intersection of two major roads and provides a large mix of retail and
entertainment facilities including seven movie theaters. Approximately 37,500
square feet of the Mall are occupied by Supersol Ltd., one of the two largest
Israeli supermarket chains, and the parent of a co-investor in Bay Heart. Shekem
Department Stores, a major Israeli department store, is the other anchor tenant
under a net lease for approximately 57,600 square feet of retail and
approximately 17,750 square


                                       10
<PAGE>   12

feet of storage and other space expiring in 2001. As of December 31, 1998,
approximately 98% of the Mall premises was occupied, primarily under two-year
leases, with options to extend for four additional years, except for anchor
tenants. The total cost of the Mall was approximately $53 million, which was
financed principally with debt. The Company owns 37% of Bay Heart.

     Due to the inability to procure the regulatory approval of the relevant
authorities to the joint venture with the Israel Ports and Railways Authority
and the subsidiary of the Egged bus company to build a transportation and
business complex next to the Mall, Bay Heart decided to revert to an alternative
plan - building a train station on its land.

     ETZ VANIR LTD. ("ETZ VANIR") AND YAKHIN MATAIM LTD. ("YAKHIN MATAIM")

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

     Ampal owns 50% of the equity of Etz Vanir and Yakhin Mataim. The remaining
50% of the equity of these companies is owned by an unrelated company, Yakhin
Hakal Ltd. ("Yakhin Hakal") which manages their operations. Because of a dispute
between Ampal and Yakhin Hakal regarding the operating agreement for the
companies, Ampal had requested that an Israeli court declare the agreement null
and void, and, in its response, Yakhin Hakal had stated that the companies owed
it approximately $4 million for services it had rendered to the companies. The
court ruled that Ampal and Yakhin Hakal should jointly appoint an additional
director of these companies, who will cast the deciding vote in cases of
dispute. Yakhin Hakal filed an appeal and requested a stay concerning the
implementation of the court's ruling. The appeal was denied by the Israeli
Supreme Court. The parties subsequently agreed to the appointment of the
Honorable Dov Levine, a retired judge, as the additional director with the
deciding vote. In addition, both Ampal and Yakhin Hakal have appointed
independent accountants who will jointly prepare Etz Vanir's and Yakhin Mataim's
financial statements. Etz Vanir and Yakhin Mataim have not reported their
financial results to Ampal since 1990 and, therefore, their financial results
have not been included in the Company's financial statements.

     In February 1995, Yakhin Hakal and its affiliates commenced a legal
proceeding seeking to cause Etz Vanir and Yakhin Mataim to redeem perpetual
debentures owned by Ampal and to require Ampal to surrender all of its preferred
shares of Etz Vanir and Yakhin Mataim for their par value, which is nominal.

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

     At the request of Ampal's attorneys, the Tel Aviv District Court has issued
a stay of performance of the judgment until the High Court of Appeals issues a
final judgment. On October 15, 1998, Ampal filed an appeal with the High Court
of Appeals in Jerusalem. It is not expected that a final judgment will be
rendered before the end of 1999. See "Legal Proceedings."

     INDUSTRIAL BUILDINGS CORPORATION LTD. ("INDUSTRIAL BUILDINGS")

     Industrial Buildings, 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 


                                       11
<PAGE>   13

coordinates the work of contractors, planners and suppliers of various
engineering services.

     Industrial Buildings owns approximately 13.6 million square feet of space
in industrial buildings throughout Israel. It owns both multi-purpose buildings
and built-to-suit buildings which are constructed in accordance with the
specific requirements of tenants. In certain cases, there is an option in the
tenant's favor to purchase the leased property, and, in the case of most
built-to-suit properties, a commitment on the part of the tenant to purchase the
property.

     The buildings which are owned by Industrial Buildings are leased to
approximately 2,360 lessees under net leases having terms of up to ten years.
The occupancy rate in buildings owned or leased by Industrial Buildings was
approximately 85% at December 31, 1998.

     Industrial Buildings' plans include building a project in the Tel Aviv area
comprising approximately 448 apartments, a commercial center of approximately
43,000 square feet, an office building of approximately 156,000 square feet and
parking facilities of approximately 883,000 square feet.

     Approximately 5.8% of Industrial Buildings' space is located in the
administered territories. Industrial Buildings cannot predict whether the
ongoing peace process involving the State of Israel and the Palestine Liberation
Organization will have an effect on this space. Historically, however, the
Government of Israel has compensated property owners for forfeitures resulting
from government actions.

     Industrial Buildings' policy is to distribute as a dividend not less than
60% of each year's earnings during the period 1993 through 2000. In December
1998, Industrial Buildings distributed a dividend of approximately NIS 60
million ($14.4 million).

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

     Industrial Buildings had a staff of approximately 51 permanent employees as
of December 31, 1998.

     The Company's interest in Industrial Buildings, as of December 31, 1998,
was 5.6%.

     OPHIR HOLDINGS LTD. ("OPHIR")

     Ophir is a holding and investment company that owns interests in high
technology and real estate companies. Ophir has invested in two mutual funds and
thirteen start-up companies in the fields of biotechnology, software and medical
equipment. During 1998, Ophir invested $6.1 million in start-up companies and
wrote-down $1.2 million as research and development or equity. Ophir is
42.5%-owned by the Company.

     Ophir owns, through a wholly-owned subsidiary, seven real estate properties
located in Israel aggregating approximately 118,360 square feet. Two of these
properties are leased to Hapoalim or its subsidiaries.

     The Company and INV, which also owns 42.5% of Ophir, are parties to a
shareholders' agreement regarding joint voting, directorships and rights of
first refusal with respect to Ophir.



                                       12
<PAGE>   14

     Ophir owns two acres of land in an industrial park in Netanya, Israel
together with an unrelated party. These parties entered into a joint venture
agreement regarding this site on which they intend to develop a 326,000 square
foot building (including parking) for both industrial and commercial uses. The
estimated cost of development of this project is $17.5 million. Ophir's share of
the property and joint venture is 70%. Through December 31, 1998, Ophir invested
$8.8 million in the development of the building. Part of the building (50% of
main area) is leased already.

     On January 7, 1999, the joint venture entered into an agreement to sell
9000 square feet of the building for $1.2 million.

     Ophir owns a 16.7% interest in the Shmey-Bar group of companies
("Shmey-Bar"). Shmey-Bar acquired 2.3 million square feet of real estate
properties from Hamashbir Hamerkazi, Ltd. ("Hamashbir Hamerkazi") for $27.7
million. In the same transaction, Shmey-Bar received an option to acquire, for
$26.3 million, an additional 700,000 square feet of real estate properties from
Hamashbir Hamerkazi. These properties are situated in various locations in
Israel. Ophir's interest in Shmey-Bar was acquired with a nominal investment
accompanied by a $2.6 million shareholder's loan.

     Ophir was, through a wholly-owned subsidiary, a limited partner in Clark/67
Associates L.P. ("Clark/67") which purchased an office building in New Jersey
for $3.2 million. Ophir invested $250,000 of Clark/67's $500,000 capital. Ophir
sold its interest in Clark/67, effective February 20, 1998 for a sale price of
$1.2 million, representing an estimated net profit after taxes of $0.9 million
to Ophir.

     On October 17, 1996, Memco Software Ltd. ("Memco"), a provider of computer
security solutions, conducted its initial public offering of 3,870,000 ordinary
shares (including 450,000 over-allotment shares) at $15.00 per share. Memco sold
3,450,000 of these shares and received net proceeds of approximately $46
million, and existing shareholders sold 420,000 shares. Prior to the offering,
Ophir owned a 17.9% interest in Memco, which it purchased for $2.5 million.
Ophir sold ordinary shares in the offering, reducing its ownership interest to
13.1%. The Company recorded a fourth quarter gain in 1996 of approximately $1.2
million, after taxes, with respect to the offering. In 1997, Ophir sold an
additional 200,000 shares of Memco for a gain of $2.3 million, after taxes and
in the first quarter of 1998 sold 200,000 shares of Memco for a gain of $2.1
million after taxes. After these sales, Ophir has a 10.3% interest in Memco.

     Since Ophir no longer has significant influence in Memco (because of the
reduced ownership interest and cancellation of the voting agreements and total
waiving of Ophir's rights to nominate a director), the use of the equity method
for the investment in Memco was stopped as of April 1, 1998 and the carrying
value presented an "available for sale" investment.

     On May 1998, Memco purchased two companies for $44 million in shares and
$11 million in cash, reducing Ophir's equity interest to 9.3%.

     On August 13, 1998, Memco entered into an agreement with Platinum
Technology International Inc. (one of Memco's shareholders), pursuant to which,
at the effective time of the arrangement, each outstanding Memco ordinary share
will be exchanged for 0.836 of share of Platinum and Memco will become a
wholly-owned subsidiary of Platinum. Completion of the arrangement depends upon
meeting a number of conditions. Ophir is the owner of 1,626,397 Memco's shares
(9.3%).

     In December 1994, Ophir invested approximately $6.75 million and acquired
33% of a 60,000 square foot property in Tel Aviv. The owners of the property
have nearly completed construction of a building on the property consisting of
229,000 square feet of office space, 22,000 square feet of commercial space and
500 parking spaces at a total cost of approximately $30 million. In addition,
Granite invested $3 million and acquired 17% of this property. It is anticipated
that Hapoalim will occupy space in this building. Since January 1995, Ophir and
Granite have invested additional funds for the construction of the building. On
February 20, 1997, Ophir, Granite, and an unrelated third party, Zeus
Investments Ltd., entered into an agreement with Revadim (Properties) Ltd., a
subsidiary of Hapoalim, to sell their interests in the property. Pursuant to the
agreement, Granite 


                                       13
<PAGE>   15

and Ophir will sell their entire interests and Zeus will sell a portion of its
interest. Granite's share of the consideration will be approximately NIS 36
million (approximately $10.7 million) and Ophir's share will be approximately
NIS 70 million (approximately $20.9 million). Completion of the sale, upon the
completion of the building, took place in the second quarter of 1998. In 1997,
Ophir recorded a net gain of $1.9 million, after taxes, from the sale of the
building based on an estimated partial completion of the building and an
estimated provision for construction costs. In 1998, Ophir recorded a net gain
of $1.9 million.

     In September 1995, Ophir acquired a 10% interest in a joint venture which
has agreed to purchase 4.4 million square feet of land near Haifa for
approximately $15 million, on which the parties intend to develop a commercial
real estate project for rent. Ophir has obligated itself to invest up to $1.5
million in the first stage of this project and its share of development costs is
estimated to be as much as $30 million.

     On September 16, 1998, Teledata Communications Ltd. ("Teledata") entered
into an agreement with ADC Telecommunications Inc., pursuant to which, ADC
agreed to pay $15.7 for each of Teledata's shares. The deal was completed in
November 1998 and Ophir received $5.6 million. Ophir recorded a loss of $.9
million on the sale of Teledata's shares in 1998.

     On December 31, 1998, the 52% interest in Industrial Buildings was
transferred from Minvat, a 25%-owned affiliate of Ophir, to Mivnat's
shareholders. Ophir currently holds a direct interest of 13.2% of Industrial
Buildings, and has appointed two directors to its board of directors, one from
Ampal and the other from INV.

     In 1998, Ophir paid $7.0 million for dividends declared in 1997, and
declared dividends of $4.8 million paid in January 1999.

     In February 1998, Dr. Gleitman, Chief Executive Officer of Ampal, became
the Chairman of the Board of Directors of Ophir.

ENERGY DISTRIBUTION

     GRANITE HACARMEL INVESTMENTS LTD. ("GRANITE")

     Granite owns the Sonol group of companies, the second largest Israeli
distributor of refined petroleum products. Supergas, a wholly-owned subsidiary
of Granite, is the third largest marketer and distributor in Israel of liquefied
petroleum gas. Through its subsidiaries, Granite also manufactures and markets
lubricating oils and automotive batteries.

     During 1998, Sonol had a net gain of 7 public gas stations to its network.
As of December 31, 1998, Sonol supplied petroleum products to 180 public gas
stations in Israel, of which 134 are owned by or leased to Sonol. Sonol sold
approximately 2.3 million metric tons of refined petroleum products and
lubricating oils in 1998.

     Sonol and Delek The Israel Fuel Corporation Ltd. ("Delek") jointly own the
rights to the Dalkan 2000, a computerized system for marketing fuel products
(primarily to automobile fleets). On January 26, 1997, the anti-trust
commissioner ruled that the joint marketing arrangement of the Dalkan 2000
system between Sonol and Delek is a restrictive trade agreement. As a result of
the position taken by the Controller, Sonol and Delek agreed to divide the
Dalkan 2000 system between themselves so that each company will operate an
independent system in a manner that will enable customers, in accordance with
their own preferences, to enter into an agreement with either of the companies.
The implementation of the separation agreement was carried out during 1998.



                                       14
<PAGE>   16

     During 1998, the former controlling shareholder of Granite, the Mashav
group, sold its 56.9% interest in Granite, in an auction yielding a company
valuation of approximately $350 million, to a group consisting of the Borovitz
family, controlling shareholder of Arkia, one of Israel's aviation companies and
Glenkor, a Swiss corporation which is one of the world's largest crude oil
dealers. Granite's Chairman is Mr. Y. Borovitz, who is the CEO of Arkia.

     During December 1998, Granite declared and paid to its shareholders cash
dividends in a total amount of NIS 500 million. The Company's share in such
dividends was the equivalent in US$ of NIS 93 million.

     The Company's ownership of Granite, as of December 31, 1998 was 19.1%. As a
result of a recent sale of Granite Hacarmel Investments Ltd by its controlling
shareholder, the shareholders' agreement which had been in effect between that
shareholder, the Company and the Landau Group, as defined below, was terminated.
The Company entered into a new shareholders' agreement, dated July 16, 1998,
with Yeshayahu Landau and Yeshayahu Landau Properties (1998) Ltd. (collectively,
the "Landau Group"), with respect to their interests in Granite. In addition to
the shareholders' agreement the new controlling shareholders of Granite agreed
to maintain the same board representations which existed prior to the sale. Two
of the Company's representatives are members of the board of directors of
Granite and one representative is a member of the executive committee of the
board of Granite. As of the beginning of March 1999, the Company owns an
approximately 20.3% interest in Granite and the Landau Group owns an
approximately 19% interest in Granite.

HOTELS AND 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). (The park
in Maui was opened to the public in March 1998).

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

     Coral World's parks hosted approximately 1,251,000 visitors during 1998.
Coral World employed approximately 250 persons as of December 31, 1998.

     On February 24, 1999, a wholly-owned subsidiary of Coral World sold its
aquarium in Manly (Australia) to an unrelated party for AU$1.6 million. This
aquarium has had an operating loss since its purchase by Coral World in 1992.
This subsidiary, Coral World Manly Pty. Ltd., remains the owner of a small real
estate property in Sydney.

     Coral World is in litigation with respect to insurance coverage for a U.S.
$1.2 million claim relating to hurricane damages in St. Thomas in 1995. The
outcome of this dispute has not been determined.

     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 property
on which the Club is situated. The Club's facilities include swimming pools,
tennis courts and a clubhouse.

     The Club, which has a capacity of 2,000 member families, had approximately
1,800 member families for the 1998/99 season and approximately 1900 member
families for the 1997/98 season. The construction cost of the Club was $5.2
million, which was financed 


                                       15
<PAGE>   17

principally with debt. Kfar Saba's revenues are principally attributable to
annual memberships. The Company owns 51% of Kfar Saba.

     HOD HASHARON SPORT CENTER (1992) LIMITED PARTNERSHIP ("HOD HASHARON")

     On December 31, 1995, the Company purchased from Kfar Saba its 50% interest
in Hod Hasharon for $1.4 million.

     Hod Hasharon operates a similar country club facility (the "H.H. Club") in
Hod Hasharon, a town adjacent to Kfar Saba. The H.H. Club, which has a capacity
of 1,600 member families, has operated at capacity for the past two years. The
H.H. Club, which opened in July 1994, was constructed at a cost of $4.8 million,
of which $2.1 million was borrowed from banks.

     MORIAH HOTELS LTD. ("MORIAH")

     Moriah, which is 46%-owned by the Company, is one of the largest hotel
chains in Israel based both upon the number of rooms and the number of
locations.

     The following chart provides certain information with respect to hotels
Moriah owns or operates:

<TABLE>
<CAPTION>
                                                                      NO. OF        MORIAH'S
LOCATION                                              CATEGORY        ROOMS         INTEREST
--------                                              --------        -----         --------
<S>                                                  <C>                  <C>       <C>
Jerusalem........................................... Luxury                 292     Owns
Eilat............................................... Luxury                 306     Owns
Dead Sea............................................ Luxury                 220     Owns
Tel Aviv............................................ Luxury                 355     Leases(1)
Tiberias............................................ Luxury                 265     Leases(2)
Dead Sea............................................ First Class            196     Manages(3)
Zichron Yaakov...................................... Economy                112     Manages(4)
Nazareth............................................ Economy                120     Manages(4)
                                                                   -------------    
Total...............................................                      1,866     
                                                                   -------------    
</TABLE>
-----------
(1)  Net lease which expires in 2006.

(2)  Net lease which expires in 2001.

(3)  Management agreement which expires in March 1999.

(4)  Management agreement which expired in March 1998.

     Moriah's competitive position has been enhanced by operating out of more
locations than any other chain in Israel, improving its facilities and providing
high quality service to its guests. During 1998, Moriah spent approximately $4.4
million on general improvements and renovations.

     Tourist arrivals in Israel during 1998 and 1997 were 1.9 million and 2.1
million, respectively. Moriah's occupancy rate was 66% (68%, exclusive of the
economy hotels) in 1998 and 67% (68%, exclusive of the economy hotels) in 1997.
The average occupancy rate in the Israeli hotel industry during 1998 was 59%.
Moriah's average room rate (expressed in dollars) decreased by 9% in 1998
compared to 1997.

     Moriah's competitive position could be adversely affected by economic
changes in foreign countries, construction of new hotels in locations which
compete with Moriah's hotels or unrest in Israel or other areas of the Middle
East. As a result of the significant rise in tourism in Israel in some recent
years, additional hotels have been or are being constructed and competition is
expected to intensify.



                                       16
<PAGE>   18

     Moriah employed approximately 1,515 persons as of December 31, 1998.

     In December 1995, Moriah entered into an agreement with Radisson SAS, the
international hotel chain, pursuant to which Moriah has been granted a 30-year
exclusive franchise in Israel. Moriah's hotels have been renamed to include the
Radisson name and are now included in the Radisson reservation network. The
agreement also grants Moriah the right to operate hotels in Jordan under the
name Radisson Moriah.

     On January 25, 1999, the Company accepted a tender from Koor Tourism
Enterprises (which tendered, jointly with the Sheraton International chain) for
the acquisition of the Radison Moriah Hotels chain ("Moriah"), the Company's
46%-owned affiliate, for $37.5 million. This transaction was approved by
Israel's Anti-Trust Commissioner. If the aforementioned transaction is
consummated, the Company will record a gain on sale in the amount of
approximately $12.4 million ($8 million, net of income taxes). In the event that
Moriah distributes dividends prior to the completion of the sale, the sales
price will be adjusted by the amount of the dividends received.

     The sale of the Moriah Hotels chain was initiated as a result of strategic
policy adopted by Ampal's Board of Directors in 1998.

FINANCE AND OTHER HOLDINGS

     AM-HAL LTD. ("AM-HAL")

     The Company and a subsidiary of The Israel Corporation, a major Israeli
holding company, each own 50% of Am-Hal. The aggregate cost of the center was
approximately $21 million, and was financed principally by loans made or
guaranteed by the shareholders and refundable tenant deposits. These loans have
been repaid.

     Am-Hal has developed and operates a luxury senior citizens center in Rishon
Lezion, a city located approximately 10 miles south of Tel Aviv. The center,
which was completed in March 1992, includes 162 apartments (of which 152 were
occupied on December 31, 1998), an 80-bed geriatric ward, a swimming pool and
other recreational facilities. The geriatric ward is leased by Am-Hal to a
non-affiliated health care provider until 2002. Rental payments are based upon
the profits of the geriatric ward, with a minimum rent of $340,000 per year.

     Due to the success of this project and the increased demand for such
services, Am-Hal has entered into a joint venture agreement with, among others,
the owner of a property consisting of 2.5 acres of land in Hod Hasharon, a city
located approximately 7 miles north of Tel Aviv. The joint venture intends to
build a senior citizens center on this site, a building of approximately 225,000
square feet (the building in Rishon Le-Zion is approximately 120,000 square
feet). It is anticipated that the center will include 260 apartments. The joint
venture anticipates that the center will be opened June 2000. The total cost of
the project will be approximately $42 million. By the end of 1998, 16 apartments
had been sold.

     EPSILON INVESTMENT HOUSE LTD. ("EPSILON")

     In January 1995, the Company invested $1.5 million and acquired 20% of
Epsilon and its affiliate, Renaissance Investment Company Ltd. ("Renaissance").
Epsilon is an investment bank which provides portfolio management services and
Renaissance provides underwriting services in Israel through its subsidiaries.

     RENAISSANCE ISRAEL

     In July 1994, the Company agreed to invest $3 million for 15% of
Renaissance Israel, a fund that invests in Israel-related companies generally on
the same terms and conditions as the Renaissance Fund LDC (the "Renaissance
Fund"). The Renaissance Fund was formed in 1994 to invest primarily in emerging
markets, basic industry and government privatizations 


                                       17
<PAGE>   19

in Israel and elsewhere in the Middle East. The Company had invested an
aggregate of $2.8 million in Renaissance Israel, as of December 31, 1997. In
March 1998, the Company invested approximately $60,000, reducing its outstanding
commitment to approximately $150,000.

     The only active investment made by the Company through the Renaissance fund
which is still on the Company's books is an investment in Clalcom. Book value of
which at the end of December 31, 1998 was $370,000.

INDUSTRY

     CARMEL CONTAINER SYSTEMS LIMITED ("CARMEL")

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

     Carmel estimates that it manufactures approximately 25% of the folding
board, approximately 85% of the corrugated triple wall, and approximately 35% of
the corrugated board packaging in Israel. Carmel's products are marketed to a
wide variety of customers for diverse uses, but its principal market is
packaging for agricultural products and for the food and beverage industry.
During the last few years, sales of packaging products to exporters of
agricultural products have declined slightly, but have been partially offset by
an increase in domestic sales.

     In 1996, 1997 and 1998 Carmel invested approximately $34 million for
machinery and infrastructure. In December 1996, one of Carmel's plants was
relocated to a leased property in Caesarea, Israel and a second plant was moved
and combined with the first plant in the third quarter of 1997. As of December
31, 1998, Carmel employed 690 persons.

     As of December 31, 1998, the Company owned 20.7% of the shares of Carmel.
Shares of Carmel are listed for trading on the AMEX under the symbol "KML". The
Company, American Israel Paper Mills Ltd., the largest paper producer in Israel,
and Robert Kraft, a United States investor, are parties to a shareholders'
agreement with respect to their shareholdings (which aggregate approximately 78%
of the shares) in Carmel. The agreement includes provisions governing board
representation, required votes for specified corporate actions, matters on which
the shareholders agree to cooperate and rights of first refusal with respect to
the sale or transfer of the shares owned by the parties. Carmel has granted to
International Forest Products Corporation, an affiliate of Mr. Kraft, a right to
supply up to 80% of Carmel's requirements for imported paper and forest products
in the ordinary course of Carmel's business, on a competitive basis.

     M.D.F. INDUSTRIES LTD. ("M.D.F.")

     M.D.F. the Company's 50%-owned affiliate, which has established a plant in
Israel for the production of medium density fiber boards, and which completed
its running-in period on June 30, 1996, incurred significant losses in 1996 and
1997. The losses in 1997 are primarily attributable to a slow-down in the
Israeli construction industry where M.D.F. primarily markets its products. In
view of the substantial losses incurred by M.D.F. and the continuing depressed
prices with respect to its products, the Company believes that further
substantial losses will be incurred by M.D.F. Consequently, because of the
uncertainty with respect to M.D.F.'s future operations, the Company recorded a
loss from impairment of this investment in December 1996 for its full remaining
investment in and loans to M.D.F. in the amount of $8.8 million. This loss, in
addition to the $1.3 million loss previously recorded by the Company in 1996
with respect to M.D.F., resulted in a total loss attributable to the operations
of M.D.F. in the amount of $8.6 million, net of tax benefits. M.D.F. is no
longer accounted for as an affiliate of the Company under the equity method of
accounting. The Company, however, continues to be contingently liable with
respect to $5 million of guarantees given by the Company with respect to
M.D.F.'s bank obligations. The Company is attempting to reduce its exposure
under these guarantees.

                                       18
<PAGE>   20

     In an effort to improve its financial results, M.D.F. is attempting to
improve its efficiency and reduce its costs. Furthermore, pursuant to a request
made by M.D.F., it is anticipated that an anti-dumping duty will be imposed by
the Minister of Industry and Commerce on medium density fiber boards which are
being imported from the United States and Europe.

     Paradise Industries Ltd. ("Paradise")

     Paradise is a leading manufacturer and distributor of mattresses and
fold-out beds in Israel. Paradise manufactures and distributes its mattresses
under the brand names "Paradise," "Mefi" and "Sealy." "Sealy" mattresses are
manufactured and distributed by Paradise under a ten-year exclusive license
covering the Israeli market expiring in 2002 with an option for an additional
five-year term. Paradise owns its own manufacturing facilities. It distributes
mattresses through independent stores and by direct sales to hotels.

     On June 26, 1997, Paradise's main factory was heavily damaged by a fire and
has been closed since then. Paradise was, however, able to resume its activities
at the end of the third quarter by assembling mattresses and sofa beds out of
its newly-built assembly plant rather than manufacturing them. Paradise uses
imported and domestically produced components in its assembly process. Paradise
carried both fire damage and business interruption insurance covering the
factory. In December 1997, Paradise settled with the insurance company and
agreed to accept $7.1 million of compensation for the damage caused by the fire.
Paradise received $6.8 million of the insurance proceeds in December 1997 and
the balance in early 1998. The insurance recovery for the loss of profits caused
by fire was $.8 million. Paradise was also compensated for the additional
expenses it incurred as a result of the fire.

     In January 1998, a new managerial team, experienced in the mattress and
bedding industry, was installed at Paradise. Throughout 1998, the number of the
Company's employees was reduced to 75 while at the same time production
continued, the break even point of the plant declined substantially and the
production potential grew.

     The Company currently owns 85.1% of the share capital of Paradise.

Employees

     As of December 31, 1998, Ampal had 6 employees. Ampal (Israel) had two
employees, Ampal Industries (Israel) Ltd. had eleven employees, and Ampal
Development (Israel) Ltd. had one employee. Relations between Ampal 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 has existed, varying as to degree and intensity, between Israel and
the Arab countries and the Palestine Liberation Organization (the "PLO"). While
negotiations have taken place and are taking place between Israel, its Arab
neighbors and the PLO to end the state of hostility in the region, it is not
possible to predict the outcome of these negotiations and their eventual effect
on Ampal and its investee companies.

Economic Activity

     Many of the Company's investee companies borrow and lend shekel-based loans
which are typically linked to the Israeli Consumer Price Index ("CPI").
Therefore, changes in (i) the CPI, (ii) the rate of exchange between the Israeli
shekel and the U.S. dollar, and (iii) inflation in Israel, can have a direct
affect on the Company's financial statement.



                                       19
<PAGE>   21

     The Israeli inflation rate in 1998 was 8.6% versus 7.0% in 1997. The
highest price increases were in miscellaneous 11.6%, fruits and vegetables
11.6%, furniture and house equipment 10.4%, health care (9.2%), education,
culture and entertainment (8.6%), and food, excluding fruits and vegetables
(8.4%). The housing index rose 8.8%. Until August 1998, the annual inflation
rate was approximately 1.0%, but due to the drastic devaluation of the NIS
versus the US$, as a result of global crisis, a rapid increase in prices
occurred. The Israeli economy grew 2.0% in 1998, the lowest rate of the decade.
From 1990 to 1995, the Gross Domestic Product rose from 6% to 7% annually,
declining to 4.7% in 1996.

     During 1998, the shekel was devalued by 17.6% relative to the United States
dollar, a rate which was higher than the annual inflation rate.

     To offset the effects of inflation on the purchasing power of the Israeli
currency, the Government of Israel has instituted "linkage" policies which have
also been followed by most private organizations. Through linkage, the amount of
an obligation or payment is increased from time to time by an amount related to
changes in an index which may be the exchange rate of a foreign currency or a
price index. The payee is thus compensated for the relative decline in the
purchasing power of the NIS. Linkage adjustments may be based upon the total or
only a specified percentage of the change in the index being used. Many
obligations or payments in shekels are linked to the United States dollar or the
Israeli CPI, including payment obligations and receivables of many of the
Company's investees.

     The following table sets forth for the periods indicated the effects of
annual inflation on linkage adjustments and annual devaluations, as discussed in
the preceding paragraph:

<TABLE>
<CAPTION>
                                                   Israel                                             Annual             U.S.
                                                   Annual        Closing                            Inflation           Annual
                                                 Inflation      Exchange            Annual         Adjusted for        Inflation
Year Ended Dec. 31                                 Rate(1)       Rate(2)        Devaluation(3)     Devaluation(4)       Rate(5)
------------------                                 -------       -------        --------------     --------------       -------
<S>                                                  <C>          <C>                 <C>             <C>               <C>
1992.....................................             9.4         2.764               21.1            (9.66)            3.0
1993.....................................            11.2         2.986                8.0             2.96             3.0
1994.....................................            14.5         3.018                1.1            13.25             2.6
1995.....................................             8.1         3.135                3.9             4.04             2.8
1996.....................................            10.6         3.251                3.7              6.6             3.3
1997.....................................             7.0         3.536                8.8            (1.65)            1.7
1998.....................................             8.6          4.16               17.6            (7.66)            1.6
</TABLE>

-----------
(1)  "Israel Annual Inflation Rate" is the percentage increase in the Israeli
     CPI between December of the year indicated and December of the preceding
     year.

(2)  "Closing Exchange Rate" is the rate of exchange of one United States dollar
     for the NIS at December 31 of the year indicated as reported by the Bank of
     Israel.

(3)  "Annual Devaluation" is the percentage increase in the value of the United
     States dollar in relation to the NIS during the calendar year.

(4)  "Annual Inflation Adjusted for Devaluation" is obtained by dividing the
     December Israeli CPI by the Closing Exchange Rate, thus first obtaining a
     United States dollar-adjusted Israeli CPI, and then calculating the yearly
     percentage changes in this adjusted index.

(5)  "U.S. Annual Inflation Rate" is obtained by calculating the percentage
     change in the United States Consumer Price Index for All Urban Consumers,
     as published by the Bureau of Labor Statistics of the United States
     Department of Labor.



                                       20
<PAGE>   22

Israeli Investment

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

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

              CERTAIN UNITED STATES AND ISRAELI REGULATORY MATTERS

SEC Exemptive Order

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

Israeli Banking Regulations

     A provision of the Banking (Licensing) Law, 5741 1981, as amended (the
"Banking Law"), imposes limitations on the purchase and holding of means of
control of non-banking corporations by Israeli banks. The Banking Law does not
permit Israeli banks, including Hapoalim, to invest more than 25% of its capital
in non-banking corporations, including Ampal, or to hold more than 25% of the
means of control of each such corporation.

     Under an amendment to the Banking Law enacted in March 1994, Israeli banks,
including Hapoalim, were required to reduce their holdings in and means of
control over grandfathered non-banking corporations, including Ampal, to 25% by
not later than December 31, 1996, and to 20% by December 31, 1999. Pursuant to
this amendment, each bank's permitted investments in non-banking corporations by
the end of 2002 cannot exceed 15% of each Israeli bank's capital, with the
addition of up to 10% of its capital permitted to be invested, subject to
certain limitations, in certain eligible non-banking corporations. In order to
comply with Banking Law, during 1996 Hapoalim engaged in a series of
transactions which reduced its holdings in Ampal and resulted in Hapoalim no
longer controlling Ampal.

     From time to time, the Company engages in transactions with Hapoalim and
its affiliates. Currently, the Company maintains substantial deposits with
Hapoalim and its subsidiaries. See "Certain Relationships and Related
Transactions."

United States Banking Regulations

     Hapoalim is subject, through the United States International Banking Act of
1978 ("IBA"), to the provisions of the United States Bank Holding Company Act of
1956 ("BHC"). Due to Ampal's status as a subsidiary of Hapoalim for purposes of
the IBA and BHC, there may be limitations upon the direct or indirect investment
activities of Ampal in the United States. While Ampal itself is considered to be
a "grandfathered" investment of Hapoalim under the IBA for purposes of the BHC
(which status may be reviewed by the Board of Governors of the Federal Reserve),
Ampal may not invest in more than 25% of the voting shares or the equity of
United States corporations or non-United States corporations which have a
majority of their assets in or revenues derived from the United States, subject
to certain exceptions. Management of Ampal does not believe that these
limitations contained in the BHC and the regulations of the Board of Governors
of the Federal Reserve System 


                                       21
<PAGE>   23

thereunder have had or will have any material adverse impact upon the Company or
its operations.

                                 TAX INFORMATION

Israeli Taxation of Ampal

     Ampal (to the extent that it has income derived in Israel) and Ampal's
Israeli subsidiaries are subject to taxes imposed under the Israeli Income Tax
Ordinance. For 1997, Israeli companies were taxed on their income at a rate of
36%.

     A tax treaty between Israel and the United States became effective on
December 30, 1994. This treaty has not had a substantial impact on the taxation
of the Company in the United States or in Israel.

     Ampal has income from interest, rent and dividends resulting from its
investments in Israel. Under Israeli law, Ampal has been required to file
reports with the Israeli tax authorities with respect to such income. In
addition, as noted below, Ampal is subject to a withholding tax on dividends
received from Israeli companies at a rate of either 25%, 15% or 12.5%, depending
on the percentage ownership of the investment and the type of income generated
by that company (as opposed to dividends payable to Israeli companies which are
exempt from tax, except for the dividends paid by an approved enterprise to
either residents or non-residents, the tax on which is withheld at a rate of
15%). Under an arrangement with the Israeli tax authorities, such income has
been taxed based on principles generally applied in Israel to income of
non-residents. Ampal has filed reports with the Israeli tax authorities through
1996 and has received "final assessments" with respect to such reports filed
through 1993 (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 1993, it has
not been required to make any additional tax payments in excess of the
withholding on its dividends. In addition, under Ampal's arrangement with the
Israeli tax authorities, the aggregate taxes paid by Ampal in Israel and the
United States on interest, rent and dividend income derived from Israeli sources
has not exceeded the taxation which would have been payable by Ampal in the
United States had such interest, rent and dividend income been derived by Ampal
from United States sources. There can be no assurance that this arrangement will
continue in the future. This arrangement does not apply to taxation of Ampal's
Israeli subsidiaries.

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

     Under Israeli law, a tax is payable on capital gains of residents and
non-residents of Israel. With regard to non-residents, this tax applies to gains
on sales of assets either located in Israel or which represent a right to assets
located in Israel (including gains arising from the sale of shares of stock in
companies resident in Israel). Since January 1, 1994, the portion of the gain
attributable to inflation prior to that date is taxable at a rate of 10%, while
the portion since that date is exempt from tax, while the remainder of the
profit, if any, was taxable to corporations at 36% in 1998. Non-residents of
Israel are exempt from the 10% tax on the inflationary gain derived from the
sale of shares in companies that are considered Israeli residents if they choose
to compute the inflationary portion of the gain based on the change in the rate
of exchange between 


                                       22
<PAGE>   24

Israeli currency and the foreign currency in which the shares were purchased
from the date the shares were purchased until the date the shares were sold.

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

     Individuals and companies in Israel pay VAT at a rate of 17% of the price
of assets sold and services rendered. They can deduct VAT paid on goods and
services acquired by them for the purpose of their business.

United States Taxation of Ampal

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

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

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

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

     Item 2. Property

     Ampal subleases 4,960 rentable square feet of office space leased by
Hapoalim at 1177 Avenue of the Americas, New York City under a sublease which
expires on August 30, 2009. The base rent, which commenced in September 1994, is
$169,000, subject to escalation. In 1998, Ampal's total payment to Hapoalim in
connection with this lease was $170,000.



                                       23
<PAGE>   25

     The Company leases office space in various locations in Israel to Hapoalim
and its subsidiaries, pursuant to leases which will generally expire in the
years between 2000 and 2003, in exchange for total rental payments in 1998 of
approximately $2,870,000. Generally, the annual payments are based upon 10% of
the value of the property linked to the CPI. In addition, the Company leases
spaces primarily for retail use to non-related parties and received
approximately $4,432,000 in rent for such spaces in 1998.

     Other properties of the Company, and the Company's acquisition of a
building located at 800 Second Avenue, New York, New York and the building's
subsequent conversion into an office condominium, are discussed elsewhere in
this Report. See "Business."

ITEM 3. LEGAL PROCEEDINGS

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

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

     At the request of Ampal's attorneys, the Tel Aviv District Court has issued
a stay of performance of the judgment until the High Court of Appeals issues a
final judgment. On October 15, 1998, Ampal filed an appeal with the High Court
of Appeal in Jerusalem. It is not expected that a final judgment will be
rendered before the end of 1999. See "Etz Vanir."

     For a description of a claim for NIS 3.6 million asserted against Ampal
Financial, see "Real Estate-Ampal Development
(Israel) Ltd., Nir Ltd. and Ampal Financial Services Ltd."

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

     None.

                                     PART II

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

                          PRICE RANGE OF CLASS A STOCK

     Ampal's Class A Stock is listed on the AMEX under the symbol "AIS.A." The
following table sets forth the high and low sales prices for the Class A Stock,
as reported on the consolidated transaction reporting system for each calendar
quarter during the periods indicated:

<TABLE>
<CAPTION>
                                                                           HIGH             LOW
                                                                           ----             ---
<S>                                                                     <C>             <C>
1998:
Fourth Quarter................................................          $  4 7/8        $  3 3/8  
Third Quarter.................................................             5 5/8           4     
Second Quarter................................................             5 3/4           5 1/8  
First Quarter.................................................             5 11/16         4 13/16

1997:
Fourth Quarter................................................          $  5 3/4        $  4 3/4  
Third Quarter.................................................             6 1/4           5 3/8  
Second Quarter................................................             6 1/8           4 3/4  
First Quarter.................................................             5 3/4           4 7/8  
</TABLE>



                                       24
<PAGE>   26

     As of March 18, 1999, there were 1,105 record holders of Class A Stock.

     Redeemable Warrants to purchase Class A Stock, issued in connection with
Ampal's 1994 public offering, were listed on the AMEX under the symbol "AIS.WS."
The warrants expired on January 31, 1999.

                                  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, which
means that any holder of at least 50% of the Class A Stock, can elect all of the
members of Ampal's Board of Directors.

                                 DIVIDEND POLICY

     In 1995, Ampal paid a dividend of $.21 per share on its Class A Stock and
Common Stock. From 1989 through 1994 and in 1996, 1997 and 1998, Ampal did not
pay a dividend on the Class A Stock, Ampal has never paid a dividend on its
Common Stock other than in 1995. Past decisions not to pay cash dividends
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 are payable as a percentage of
par value. The holders of Ampal's presently authorized and issued 4% Preferred
Stock and 61/2% 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 on
the preferred stock 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, 1998, Ampal announced that
its Board of Directors, at its meeting held on December 9, 1998, had declared
cash dividends on its preferred stock ($0.325 per share on its 6 1/2% Preferred
Stock and $0.20 per share on its 4% Preferred Stock).

                     RECENT SALES OF UNREGISTERED SECURITIES

     Pursuant to a Letter Agreement, dated as of March 1, 1997, among Ampal,
Ampal Realty Corporation, a wholly-owned subsidiary of Ampal, and Emmes Asset
Management Corp. ("Emmes"), Ampal agreed to issue to Mr. Andrew Davidoff, as
custodian, 100 shares of Class A Stock for each of his three children each year
for the duration of the effectiveness of the Letter Agreement. Emmes and Mr.
Davidoff provide general asset management and property advisory services with
respect to the building located at 800 Second Avenue in New York City. Emmes is
a wholly-owned subsidiary of Emmes & Company LLC. Mr. Michael Sonnenfeldt, a
former director of Ampal, was the founder and managing director of Emmes &
Company LLC. On July 8, 1998, Ampal issued 300 shares to Mr. Davidoff, as
custodian. See "Certain Relationships and Related Transactions" for a complete
description of the Company's agreement with Emmes. The issuance to Mr. Davidoff
of such shares was exempted from registration under the Securities Act of 1933,
as amended, pursuant to Section 4(2) of such Act.


                                       25
<PAGE>   27

ITEM 6



SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                         1998             1997            1996               1995                   1994 
------------------------------------------------------------------------------------------------------------------------------------
                                                              (Dollars in thousands, except per share data)
<S>                                           <C>             <C>             <C>                 <C>                <C>      
Revenues .................................    $  29,951       $  56,114       $  44,360           $  44,713          $  43,745
Net income (loss) ........................        2,175          14,183         (10,252)(3)           2,166(3)           7,334(3)
Earnings (loss) per Class A share:
 Basic EPS ...............................    $     .08(1)    $     .58(1)    $    (.45)(1)(3)    $     .07(1)(3)    $     .30(1)(3)
 Diluted EPS .............................    $     .07(2)    $      50(2)    $    (.45)(1)(3)    $     .06(2)(3)    $     .25(2)(3)
Total assets .............................      329,246         262,274         283,551             312,094            301,194
Notes, deposits and
 debentures payable ......................      131,010          65,053         102,414             115,881             95,995
Dividends declared per
 Class A share ...........................    $      --       $      --       $      --           $     .21          $      --
</TABLE>

(1)  Computation is based on net income (loss) after deduction of preferred
     stock dividends of $335, $351, $364, $560 and $406, respectively.

(2)  Computation is based on net income (loss) after deduction due to dilution
     in equity in earnings of affiliate of $334, $258, $402 and $556,
     respectively.

(3)  Includes (loss) income from discontinued operations, as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                         1998             1997            1996               1995                   1994 
------------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>              <C>           <C>                 <C>                <C>      
(Loss) income from
 discontinued
 operations ...........................        $     --        $     --      $   (2,892)         $  (4,315)         $     969
(Loss) earnings per Class A                                                                                        
 share from discontinued                                                                                           
 operations:                                                                                                       
  Basic EPS ...........................        $     --        $     --      $     (.12)         $    (.18)         $     .04
  Diluted EPS .........................        $     --        $     --      $     (.12)         $    (.18)         $     .04
</TABLE>


                                      26
<PAGE>   28


Items 7 & 8.


                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL
-------
The "Company" (refers to Ampal-American Israel Corporation ("Ampal"), and its
consolidated subsidiaries) acquires interests in businesses located in the State
of Israel or that are Israel-related. The Company seeks to invest in companies
which have long-term growth potential. The Company is involved in a broad
cross-section of Israeli companies engaged in various fields including high
technology and communications, hotels and leisure-time, real estate, finance,
energy distribution and industry. The Company generally participates in the
management of its investee companies through representation on boards of
directors and otherwise.

The Company emphasizes long-term appreciation over short-term returns and
liquidity. The Company often makes equity investments accompanied by more
significant loans or loan guarantees with the intention that cash flow from
operations of the investee companies will repay these loans.

The Company's results of operations are directly affected by the results of
operations of its investees. The results of companies which are greater than
50%-owned are included in the consolidated financial statements of the Company.
The Company accounts for its holdings in investees over which the Company
exercises significant influence, generally 20%- to 50%-owned companies
("affiliates"), under the equity method. Under the equity method, the Company
recognizes its proportionate share of such companies' income based on its
percentage of direct and indirect equity interests in earnings of those
companies. If the Company's interest in a subsidiary were to be reduced to
20%-50%, the investment would be recorded under the equity method. The Company's
results of operations are affected by capital transactions of the affiliates.
Thus, the issuance of shares by an affiliate at a price per share above the
Company's carrying value per share for such affiliate results in the Company
recognizing income for the period in which such issuance is made, while the
issuance of shares by such affiliate at a price per share that is below the
Company's carrying value per share for such affiliate results in the Company
recognizing a loss for the period in which such issuance is made. The Company
accounts for its holdings in investees, other than those described above, on the
cost method (see later discussion regarding Investment in MIRS) or in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."

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

For those subsidiaries and affiliates whose functional currency is considered to
be the New Israeli Shekel ("NIS"), assets and liabilities are translated at the
rate of exchange at the end of the reporting period and revenues and expenses
are translated at the average rates of exchange during the reporting period.
Translation differences of those foreign companies' financial statements are
included in the cumulative translation adjustment account (reflected in
accumulated other comprehensive loss) of shareholders' equity.

Should the NIS be devalued against the dollar, cumulative translation
adjustments are likely to result in a reduction in shareholders' equity. As of
December 31, 1998, the effect on shareholders' equity was a decrease of
approximately $18.6 million. Upon disposition of an investment, the related
cumulative translation adjustment balance will be recognized in determining
gains or losses.

YEAR 2000 COMPLIANCE
--------------------
The Company has completed the process of identifying, evaluating and
implementing changes to computer programs necessary to address the year 2000
issue which is the result of 


                                       27
<PAGE>   29

computer programs having been written using two digits instead of four to define
a year. This issue affects computer systems that have date sensitive programs
that may recognize a date using "00" as 1900 rather than 2000. Systems that do
not properly recognize such information could generate erroneous data or cause a
system to fail, resulting in business interruption. The Company presently
expects that with modifications to existing systems and software and converting
to new software, the Year 2000 issue will not pose an operational problem and
does not believe the cost of converting all internal systems to be year 2000
compliant will be material to its financial condition or results of operations.
Costs related to the year 2000 issue are being expensed as incurred. The Company
expects to complete all of its Year 2000 modifications by the end of 1999.

The year 2000 issue is expected to affect the systems of various entities with
which the Company interacts. However, there can be no assurance that the systems
of other companies on which the Company's systems rely will be timely converted,
or that a failure by another company's systems to be year 2000 compliant would
not have a material adverse effect on the Company.

INTRODUCTION OF THE EURO
------------------------
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and a new currency called the "Euro." These countries agreed to adopt the Euro
as their common legal currency on that date. The Euro trades on currency
exchanges and is available for non-cash transactions. Until January 1, 2002, the
existing sovereign currencies will remain legal tender in these countries. On
January 1, 2002, the Euro is scheduled to replace the sovereign legal currencies
of these countries.

The Company does not conduct operations in Europe. However, there are no
assurances that the implementation of the Euro will not have an adverse material
affect on the Company's financial condition and results of operations.

RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities" which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Company will adopt SFAS No. 133 in the first quarter of 2000.
The Company doesn't believe that the adoption of this SFAS will have a material
effect on its financial condition or on the results of its operations.

DISCONTINUED OPERATIONS
-----------------------
On December 23, 1996, the Company sold all of its equity interest in Pri Ha'emek
(Canned and Frozen Food) 88 Ltd. ("Pri Ha'emek") to Agrifarm International
Limited ("Agrifarm"), a British company. Accordingly, the results of Pri Ha'emek
have been presented as discontinued operations in the Company's 1996
consolidated financial statements. In connection with the sale, the Company
recorded a loss on disposition of $3.2 million and a tax benefit of $3.9
million, which was based on a total loss of its investment in Pri Ha'emek in the
amount of $9.7 million.

RESULTS OF OPERATIONS
---------------------
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
---------------------------------------------------------------------
Consolidated net income decreased from $14.2 million in 1997, to $2.2 million in
1998. The decrease in net income is primarily attributable to the decrease in
equity in earnings of affiliates, lower realized gains on investments,
unrealized losses on investments in 1998 as compared to unrealized gains in
1997, and net interest expense in 1998 as compared to net interest income in
1997. These decreases were partially offset by income tax benefits and lower
other expenses in 1998.



                                       28
<PAGE>   30

Equity in earnings of affiliates decreased to $7.3 million in 1998, from $18.7
million in 1997. The decrease is primarily attributable to the decreased
earnings of Ophir Holdings Ltd. ("Ophir"), the Company's 42.5%-owned affiliate,
which is a holding company with interests in high technology and real estate
companies. Ophir reported lower earnings in 1998 as compared to 1997, primarily
due to lower realized and unrealized gains on investments as a result of the
sale of shares of Teledata Communications Ltd. ("Teledata") in 1997.

The decrease in the equity in earnings of affiliates was partially offset by the
increased earnings of Granite Hacarmel Investments Ltd. ("Granite"), Trinet
Venture Capital Ltd. ("Trinet"), Carmel Container Systems Limited ("Carmel"),
and Moriah Hotels Ltd. ("Moriah"). Granite, the Company's 19.1%-owned affiliate,
which is one of Israel's largest distributors of refined petroleum products,
recorded higher earnings in 1998 due to improved gross profit margins and a gain
on sale of real estate property. Trinet, the Company's 50%-owned affiliate, a
high-technology venture capital fund, recorded large unrealized losses in 1997.
Carmel, the Company's 20.7%-owned affiliate, which is a manufacturer of
paper-based packaging products, also recorded higher earnings in 1998 due to the
improved efficiency at Carmel's new manufacturing plant in Caesarea and
increased sales of containers to the local market, despite the economic slowdown
in Israel. Moriah, the Company's 46%-owned affiliate (see Subsequent Event),
which owns and operates hotels in Israel reported higher earnings as a result of
lower administrative expenses and higher translation gains in 1998.

In 1998, the Company recorded $1.4 million of unrealized losses on investments
in trading securities, which are primarily attributable to the Company's
investment during the third quarter of 1998 in the shares of Bank Leumi
Le'Israel B.M. ("Leumi") in the amount of approximately $21 million. The Company
recorded $.9 million of unrealized gains on investments in trading securities in
1997 primarily attributable to its investment in Mercury Interactive Corporation
("Mercury"). At December 31, 1998 and December 31, 1997, the aggregate fair
value of trading securities amounted to approximately $26.3 million and $7.5
million, respectively.

In 1998, the Company recorded $.8 million of gains on sale of investments, which
are primarily attributable to its investments in Mercury, Shikun U'Fituach
Le'Israel Ltd., Fundtech Ltd. and M-Systems Flash Disk Pioneers Ltd. In 1997,
the Company recorded $4.5 million of gains on sale of investments, $2.9 million
of which is attributable to its direct investment in Teledata Communications
Ltd. ("Teledata").

The Company recorded net interest expense in the amount of $7 million in 1998,
as compared to net interest income of $.5 million in 1997. The net interest
expense is primarily attributable to bank borrowings in connection with the
Company's investment in MIRS Communication Company Ltd. ("MIRS").

In the fourth quarter of 1998, Granite issued additional shares upon conversion
of its debentures, and the Company's interest in Granite was diluted from 21.5%
to 19.1%. As a result of the dilution the Company recorded a gain on issuance of
shares in the amount of $1 million.

Manufacturing revenues and expenses, which reflect the operations of Paradise
Industries Ltd. ("Paradise"), the Company's 85.1%-owned subsidiary, which is a
manufacturer and distributor of mattresses and fold-out beds in Israel,
decreased as a result of the slowdown in the Israeli economy in 1998.

The Company recorded a $1.9 million loss from impairment of its investments in
Mutek Solutions Ltd., Ortek Ltd., Medco Electronics Systems and Geotek
Communications Ltd. ("Geotek") in 1998. In 1997, the Company recorded a $2.2
million loss on impairment of its investments in U.D.S. - Ultimate Distribution
Systems Ltd. and Geotek.

Other expenses decreased in 1998 as compared to the same period in 1997,
primarily as a result of a decrease in administrative expenses and the effect of
translation.

Income tax benefit in 1998 resulted from the utilization of foreign tax credits
on dividends received from the affiliates.


                                       29
<PAGE>   31

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
---------------------------------------------------------------------
Consolidated income from continuing operations increased to $14.2 million in
1997, from a $7.4 million loss in 1996. The increase resulted primarily from the
increases in equity in earnings of affiliates, realized and unrealized gains on
investments, net interest income in 1997 as compared to net interest expense in
1996, lower losses from impairment of investments, increase in other income, and
the absence of an unrealized loss on rental property in 1997 which was recorded
in 1996. These increases were partially offset by a decrease in net rental
income and a restructuring charge recorded in 1997.

Equity in earnings of affiliates increased from $6.3 million in 1996, to $18.7
million in 1997. The increase is primarily attributable to the significantly
improved earnings of Ophir and to increased earnings of Coral World
International Ltd. ("CWI"), the Company's 50%-owned affiliate, which owns and
operates marine parks in Eilat (Israel) and Perth and Manly (Australia). The
increase in Ophir's 1997 earnings resulted primarily from realized and
unrealized gains on its investment in Teledata, gains on sale of office and
commercial real estate and lower interest expense which resulted from repayments
of loans.

CWI reported earnings in 1997 as compared to losses in 1996. The losses recorded
by CWI in 1996 were primarily attributable to the company's investments in
marine parks in Nassau (Bahamas) and St. Thomas (U.S. Virgin Islands), which
were sold in September 1996 and April 1997, respectively.

The increases noted above were partially offset by the unrealized losses
recorded on its investments by Trinet in 1997 as compared to unrealized gains in
1996, and losses of Carmel. Carmel recorded losses in 1997 as compared to
earnings in 1996 primarily because of a decrease in sales volume as a result of
the economic slowdown in Israel, a decrease in sales prices as a result of
escalating competition, an increase in costs associated with the running-in of a
new plant and the one-time expenses incurred with respect to the closing of old
plants.

Moriah also recorded losses in 1997 primarily because of the decrease in
occupancy rates (excluding the hotel in Tel Aviv) as a result of the decrease in
tourism to Israel in 1997 and higher rental expenses pertaining to its hotel in
Tel Aviv.

In 1997 the Company recorded $4.5 million of gains on sale of investments, $2.9
million of which is attributable to its direct investment in Teledata, as
compared to $2 million of gains on sale of investments, including $1.5 million
with respect to Teledata, which was recorded in 1996.

The Company also recorded $.9 million of unrealized gains on investments which
are classified as trading securities as compared to $.1 million of unrealized
losses on investments in trading securities in 1996. At December 31, 1997 and
December 31, 1996, the aggregate fair value of trading securities amounted to
approximately $7.5 million and $4.9 million, respectively.

The Company recorded net interest income in 1997, as compared to net interest
expense in 1996. The increase in net interest income is primarily attributable
to debt reduction in connection with the sale of a condominium unit in an office
building located at 800 Second Avenue, New York, New York. Also, as a result of
this transaction, the Company recorded a loss of $1.1 million ($.6 million net
of taxes) in its December 31, 1996 financial statements. The decrease in rental
income and rental property expenses are also attributable to the sale of the
condominium unit.

In 1997, the Company recorded $2.2 million of losses from impairment of its
investments in its 21.9%-owned Israeli-based software company, U.D.S. - Ultimate
Distribution Systems Ltd., and in Geotek, an international wireless
telecommunications company. In 1996 the Company recorded a $10.1 million loss
($8.6 million net of taxes) from impairment of its investment in M.D.F.
Industries Ltd. ("M.D.F.").

On June 26, 1997, the main factory of the Company's 85%-owned manufacturing
subsidiary, Paradise was heavily damaged by a fire. Paradise was, however, able
to resume its activities at the end of the third quarter by assembling
mattresses and sofa beds out of its newly-built assembly plant rather than
manufacturing them. Paradise uses imported and domestically produced components
in its assembly process. Paradise carried both fire


                                       30
<PAGE>   32

damage and business interruption insurance covering the factory. In December
1997, Paradise settled with the insurance company and agreed to accept $7.1
million of compensation for the damage caused by the fire. Paradise received
$6.8 million of the insurance proceeds in December 1997 and the balance in early
1998. The insurance recovery for the loss of profits caused by fire was $.8
million. This income is included in other income in the Company's 1997
consolidated income statement. Paradise was also compensated for the additional
expenses it incurred as a result of the fire. The insurance proceeds covering
these expenses were offset against the Company's manufacturing expenses in 1997.
At December 31, 1997, Paradise deferred $.7 million with respect to the proceeds
received from the insurance company for the expenses incurred in early 1998 as a
result of the fire.

During 1997, in connection with management's plan to reorganize operations and
reduce costs, the Company recorded a restructuring charge of $1.3 million ($.7
million was recorded in the quarter ended December 31, 1997). This restructuring
which resulted in the elimination of certain corporate positions was completed
in early 1998, and primarily related to severance and other employee related
costs.

The change in the effective income tax rate in 1997 as compared to 1996 is
mainly attributable to the losses of certain Israeli subsidiaries in 1996 for
which no tax benefits were available, and to the utilization of foreign tax
credits in 1997 which were previously not available.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At December 31, 1998, cash and cash equivalents were approximately $12 million
as compared with $45.5 million at December 31, 1997. The decrease in cash and
cash equivalents and increase in investments are primarily attributable to the
investments in MIRS (See "Investment in MIRS") and Leumi (See "Discussion of
Results of Operations - Year ended December 31, 1998 compared to year ended
December 31, 1997"). The decreases in cash and cash equivalents attributable to
the aforementioned investments were partially offset by dividends received from
affiliates, which amounted to $26.2 million. The increases in notes and loans
payable and minority interests are also attributable to the investment in MIRS.
The decreases in deposits, notes and loans receivable and debentures are
primarily attributable to scheduled repayments.

In addition to the investment in MIRS, the Company made the following
investments in the high-technology field in the year ended December 31, 1998,
notably; (1) a $2.5 million investment to acquire a 9% interest in Smartlight
Ltd., a developer and marketer of innovative digital film viewers for use in the
diagnosis of medical images; (2) a $2.1 million investment to acquire an
additional 8.6% of XaCCT Technologies Ltd. (total equity interest - 18.4%), a
developer of billing, auditing and accounting software for TCP/IP networks; (3)
a $1 million investment to acquire an additional 3.8% of PowerDsine Ltd. (total
equity interest - 11.9%, after dilution), a developer, manufacturer and marketer
of innovative modules and components for the telecommunications industry; (4) a
$1 million investment to acquire a 1.75% equity interest in Compugen Ltd., a
developer of algorithms and models for the interpretation of biological
processes; (5) a $.4 million investment to acquire an additional 2% in its
existing investee NetFormX Ltd. (formerly Imagenet Ltd., total equity
interest-21%), a developer of CANER(C) family of network design, analysis and
simulation tools; and (6) $.3 million to maintain its equity interest in its
existing investee, Qronus Interactive Israel (1994) Ltd., a developer and
marketer of software testing tools.

As of December 31, 1998, the Company had issued guarantees on certain
outstanding loans to its investees and subsidiaries in the aggregate principal
amount of $12.2 million, and has commitments issued to its investees of up to
$13 million.

In 1998 and 1997, Ampal paid dividends in the amount of $.20 and $.325 per share
on its 4% and 6-1/2% Cumulative Convertible Preferred Stocks, respectively.
Total dividends paid in both years amounted to approximately $.3 million and $.4
million, respectively.


                                       31
<PAGE>   33

INVESTMENT IN MIRS
------------------
On January 22, 1998 (the "Closing Date"), the Company completed its purchase of
a one-third interest in the assets of the shared networks operation ("SNO") of
Motorola Communications Israel, Ltd. ("Motorola Israel") for a base purchase
price of approximately $110 million. The payment for the purchase price was
obtained from the Company's own resources as well as from two short-term bridge
loans ("Short-Term Loans"), one in the amount of $40 million from Bank Leumi USA
(of which $8 million plus interest was repaid on February 2, 1998) and a second
in the amount of $35 million from Bank Hapoalim B.M. ("Hapoalim"). Each loan had
a term of 90 days, bore interest at a rate of LIBOR plus 1/2% and was repaid in
full from the proceeds of the long-term loans described below.

A new wireless communications service provider, MIRS Communication Company Ltd.
("MIRS"), initially one-third owned by the Company and two-thirds owned by
Motorola Israel, coordinates and operates in Israel the digital and analog
public-shared two-way radio and other services previously furnished by Motorola
Israel. The digital wireless communication service is based on Motorola Israel's
iDENTM integrated wireless communication technology, which is known as MIRS in
Israel.

In March 1998, the Company transferred its interest in MIRS to a limited
partnership (the "Partnership"). A wholly-owned Israeli subsidiary of Ampal (the
"General Partner") is the general partner of the Partnership and owns 75.1% of
the Partnership. The limited partners of the Partnership purchased their
interests in the Partnership from the Partnership and include (i) an entity
owned by Daniel Steinmetz and Raz Steinmetz (directors of Ampal and the
controlling persons of Ampal's principal shareholder), which acquired a 9.1%
interest in the Partnership for $10 million, (ii) Hapoalim, which acquired a
7.45% interest in the Partnership for $8.195 million, (iii) an unrelated third
party (The Israel Mezzanine Fund L.P., a limited partnership whose general
partner is First Israel Mezzanine Investors Ltd.), which acquired a 7.45%
interest in the Partnership for $8.195 million, and (iv) an entity owned by Dr.
Yehoshua Gleitman, Ampal's Chief Executive Officer, which purchased a 0.9%
interest for $1 million. In addition to the purchase price, the limited partners
also reimbursed the Company for their pro rata share of the expenses incurred by
the Company in connection with the original purchase from Motorola Israel
(including interest from the Closing Date until the purchase date of the limited
partnership interests).

The related parties purchased their limited partnership interests on the same
terms as the unrelated third party which were determined through arm's length
negotiations between the Company and the unrelated third party.

Each of the limited partners paid 35% of their respective purchase price in cash
and assumed their pro rata share of Ampal's financing of the original purchase
(equal to 65% of their respective purchase prices) and assumed their pro rata
share of the Partnership's long-term financing. A portion of Dr. Gleitman's
entity's purchase price was obtained through two loans aggregating $250,000 from
the Company. One loan, in the amount of $150,000, has a term of 10 years, an
interest rate of LIBOR plus 0.8% and is without recourse to Dr. Gleitman. The
second loan, in the amount of $100,000, has a term of 10 years, an interest rate
of LIBOR plus 0.5% and is with recourse to Dr. Gleitman. Both loans are secured
by Dr. Gleitman's interest in the Partnership.

The Partnership has been assigned all of the Company's rights under the original
purchase agreement with Motorola Israel and has assumed all of its obligations.

On May 4, 1998, the Partnership received two long-term loans from Hapoalim and
Bank Leumi Le'Israel B.M. in the amount of $36.4 million, each. Both loans are
due on March 31, 2008 and bear interest at a rate of LIBOR plus 0.8%. The
principal payments are due as follows: 10% on March 31, 2004, 15% on March 31,
2005 and 25% on each of the following dates - March 31, 2006, 2007 and 2008.
Interest will be paid annually on March 31 of each year from March 31, 2001
until and including March 31, 2008. The proceeds from the long-term loans were
used to repay the Short-Term Loans.

The Partnership owns all of the authorized preferred shares of MIRS and Motorola
Israel owns all of the authorized ordinary shares. Each share issued by MIRS is
entitled to one vote.



                                       32
<PAGE>   34

The Company accounts for its investment in MIRS using the cost method of
accounting. Under the cost method, the Company recognizes income from dividends
as they are declared.

To the extent of available after-tax profits, MIRS is required to pay dividends
to the Partnership equal to at least $3,800,000 for fiscal year 2000 and
$7,100,000 for each fiscal year thereafter, so long as the financial stability
of MIRS will not be impaired. MIRS shall endeavor to pay dividends in the
following amounts: for fiscal year 1998, $4,950,000, for fiscal year 1999,
$10,725,000 and for fiscal year 2000 and thereafter, $23,430,000 (inclusive of
the required payments), which all holders of an interest in MIRS shall share on
a pro rata basis. To the extent that any of the above dividends are not paid by
MIRS, they will accumulate. No dividends will be paid by MIRS to Motorola Israel
until the Partnership has received all of its accumulated dividends. Any
dividends which are paid in excess of the above amounts for a given fiscal year
will similarly be paid pro rata to the Partnership and Motorola Israel based on
their shares in MIRS. Pursuant to the original purchase agreement, Motorola
Israel guaranteed that the Partnership would receive from MIRS at least
$3,800,000 for fiscal year 2000 and $7,100,000 for each fiscal year between 2001
and 2005 inclusive, subject to an obligation of the Partnership to repay such
guarantee payments in amount equal to the excess of the amount actually received
by the Partnership from MIRS with respect to any subsequent year over
$7,500,000.

Motorola Israel has agreed to make certain payments to the Partnership in the
event that, prior to the thirteenth anniversary of the Closing Date, there is a
dissolution, liquidation, bankruptcy, winding up, or sale of all or
substantially all of the assets of MIRS and the total proceeds to the
shareholders of MIRS is less than $450 million.

The $110 million base purchase price for the Partnership's one-third interest in
MIRS was based upon the Company's valuation of the SNO and its prospects. The
original purchase agreement provides that under specified circumstances
indicating that there has been an increase in the enterprise value of MIRS, the
Partnership must pay Motorola Israel an additional amount (the "Bonus"). The
formula for the Bonus varies depending upon whether an initial public offering
of MIRS' shares (an "IPO") has been consummated. If an IPO is consummated prior
to December 31, 2002, the Partnership must pay Motorola Israel the Bonus based
on an increase in the valuation of MIRS for purposes of the IPO. In no event
will such Bonus exceed $33 million multiplied by 1.16n, where n represents the
number of years (and any part thereof) between the Closing Date and the closing
of the IPO.

If an IPO is not consummated prior to December 31, 2002 and if all dividends
accumulated with respect to the Partnership's preferred shares up to that time
have been paid, then the Partnership must pay Motorola Israel a Bonus if (A) the
present value of the actual after tax net income of MIRS (as reported by MIRS'
auditors in compliance with generally accepted accounting principles in Israel,
excluding capital gains derived from each transaction, not in the ordinary
course of business, in which the consideration for MIRS is more than $5 million)
for fiscal years 1998 through 2002, discounted at the rate of 13%, exceeds (B)
$71 million. In this case, the amount of the Bonus, if any, will equal the
lesser of (i) the amount of such excess multiplied by 2.3376, or (ii) $46
million.

On March 21, 1999, MIRS declared a dividend, the Company's share of which
amounts to $.9 million (net of minority interest).

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. This analysis presents
the hypothetical loss in earnings, cash flows and fair values of the financial
instruments which are held by the Company at December 31, 1998, and are
sensitive to the above market risks.

Interest Rate Risks
-------------------
At December 31, 1998, the Company had financial assets totalling $38.6 million
and financial liabilities totalling $131 million, respectively. 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 held
constant.



                                       33
<PAGE>   35

At December 31, 1998, the Company had fixed rate financial assets of $27.3
million and variable rate financial assets of $11.3 million. Holding other
variables constant, a ten percent increase in interest rates would decrease the
unrealized fair value of the fixed financial assets by approximately $.3
million.

At December 31, 1998, the Company had fixed rate debt of $40.2 million and
variable rate debt of $90.8 million. A ten percent decrease in interest rates
would increase the unrealized fair value of the fixed rate debt by approximately
$.7 million. The net decrease in earnings for the next year resulting from a ten
percent interest rate increase would be approximately $.5 million, holding other
variables constant.

Exchange Rate Sensitivity Analysis
----------------------------------
The Company's exchange rate exposure of its financial instruments results from
its investments and ongoing operations in Israel. The Company doesn't utilize
foreign exchange forward contracts to hedge this exposure. Holding other
variables constant, if there were a ten percent adverse change in foreign
currency exchange rates, the Company's earnings would decrease by $1.9 million
and cumulative translation loss (reflected in the Company's accumulated other
comprehensive loss) would increase by $1.1 million.

Equity Price Risk
-----------------
The Company's investments at December 31, 1998, included marketable securities
which are recorded at fair value of $26.3 million, including net unrealized
losses of $3.6 million. Those securities have exposure to price risk. The
estimated potential loss in fair value resulting from a hypothetical 10%
decrease in prices quoted by stock exchanges is approximately $2.6 million.

SUBSEQUENT EVENTS
-----------------
On January 25, 1999, the Company accepted a tender from Koor Tourism Enterprises
(which tendered, jointly with the Sheraton International chain) for the
acquisition of the Radison Moriah Hotels chain ("Moriah"), the Company's
46%-owned affiliate, for $37.5 million. This transaction was approved by the
Israel Anti-Trust Commissioner. If the aforementioned transaction is
consummated, the Company will record a gain on sale in the amount of
approximately $12.4 million ($8 million, net of income taxes). In the event that
Moriah distributes the dividends prior to the completion of the sale, the sales
price will be adjusted by the amount of the dividends received.

Hapoalim  approached Ampal to commence negotiations regarding the potential
purchase by Ampal and its subsidiaries of Hapoalim's entire holdings in Ampal.
In connection with the proposed transaction, Ampal's Related Party Transactions
Committee approved on March 22, 1999 to continue the negotiations with Hapoalim
to acquire the entire Hapoalim holdings in Ampal in exchange for consideration
consisting of cash and certain real estate properties currently leased to
Hapoalim.


                                       34
<PAGE>   36
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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, 1998 and
1997, and the related consolidated statements of income, comprehensive income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of certain consolidated subsidiaries, which statements
reflect assets and revenues of 19% and 6%, respectively, in 1998, 18% and 32%,
respectively, in 1997, and revenues of 44% in 1996, of the related consolidated
totals. Also, we did not audit the financial statements of certain affiliated
companies, the investments in which are reflected in the accompanying financial
statements using the equity method of accounting. The Company's equity in net
earnings of these affiliated companies represents $7,995,000, $18,611,000, and
$10,443,000 of consolidated net income (loss) for the years ended December 31,
1998, 1997 and 1996, respectively. The statements of these subsidiaries and
affiliated companies were audited by other auditors whose reports have been
furnished to us and our opinion, insofar as it relates to the amounts included
for those entities, is based solely on the reports of other auditors.

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

In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Ampal-American Israel Corporation and subsidiaries as
of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.


                                             ARTHUR ANDERSEN LLP

New York, New York
March 25,1999

                                       35
<PAGE>   37

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                                                  1998              1997              1996 
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) ................................                           (Note 1)          (Note 1)

<S>                                                                                    <C>               <C>               <C>
REVENUES:
Equity in earnings of affiliates (Note 12) ...................................         $  7,328          $ 18,703          $  6,333
Manufacturing ................................................................            6,768            12,127            10,891
Interest:
 Related parties .............................................................            4,339             6,988             9,918
 Others ......................................................................              987             2,743             1,956
Rental income ................................................................            7,302             7,107            11,663
Realized and unrealized (losses) gains on
 investments (Notes 3 and 5) .................................................             (568)            5,466             1,342
Gain on issuance of shares by affiliate ......................................            1,032                --                --
Other ........................................................................            2,763             2,980             2,257
                                                                                       --------          --------          --------
     Total revenues ..........................................................           29,951            56,114            44,360
                                                                                       --------          --------          --------

EXPENSES:
Manufacturing ................................................................            8,492            12,569            12,027
Interest:
 Related parties .............................................................            5,122             2,544             3,918
 Others ......................................................................            7,195             6,719            10,163
Rental property operating expenses ...........................................            3,550             3,273             5,670
Loss from impairment of investments (Notes 3 and
 12) .........................................................................            1,890             2,185            10,083
Unrealized loss on rental property (Note 3) ..................................               --                --             1,095
Minority interests ...........................................................           (1,345)             (220)             (551)
Other ........................................................................            6,393             8,250             7,416
                                                                                       --------          --------          --------
     Total expenses ..........................................................           31,297            35,320            49,821
Restructuring charge (Note 16) ...............................................               --             1,300                --
                                                                                       --------          --------          --------
(Loss) income from continuing operations before 
  income taxes................................................................           (1,346)           19,494            (5,461)
(Benefit) provision for income taxes (Note 11) ...............................           (3,521)            5,311             1,899
                                                                                       --------          --------          --------
Income (loss) from continuing operations .....................................            2,175            14,183            (7,360)
                                                                                       --------          --------          --------
Discontinued operations (Note 2):
 Loss from operations ........................................................               --                --            (3,610)
 Loss on disposition of $3,169, net of
  applicable tax benefit of $3,887 ...........................................               --                --               718
                                                                                       --------          --------          --------
Loss from discontinued operations ............................................               --                --            (2,892)
                                                                                       --------          --------          --------

     NET INCOME (LOSS) .......................................................         $  2,175          $ 14,183          $(10,252)
                                                                                       ========          ========          ========

Basic EPS (Note 10)
 Earnings (loss) from continuing operations ..................................         $    .08          $    .58          $   (.33)
 Loss from discontinued operations ...........................................               --                --              (.12)
                                                                                       --------          --------          --------
 Earnings (loss) per Class A share ...........................................         $    .08          $    .58          $   (.45)
                                                                                       ========          ========          ========

 Shares used in calculation (in thousands) ...................................           23,911            23,742            23,549

Diluted EPS (Note 10)
 Earnings (loss) from continuing operations ..................................         $    .07          $    .50          $   (.33)
 Loss from discontinued operations ...........................................               --                --              (.12)
                                                                                       --------          --------          --------
 Earnings (loss) per Class A share ...........................................         $    .07          $    .50          $   (.45)
                                                                                       ========          ========          ========

 Shares used in calculation (in thousands) ...................................           27,624            27,615            23,549
</TABLE>



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


                                       36
<PAGE>   38


AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                      DECEMBER 31,  DECEMBER 31,
ASSETS AS AT                                              1998          1997  
--------------------------------------------------------------------------------
(Dollars in thousands)                                                (Note 1)

<S>                                                       <C>          <C>     
Cash and cash equivalents ............................    $ 12,047     $ 45,457



Deposits, notes and loans receivable (Note 4) ........      27,816       46,176



Investments (Notes 5 and 12) .........................     214,421       92,720



Investment held for sale (Note 17) ...................      25,104       24,664



Real estate rental property, less accumulated
 depreciation of $6,492 and $5,902 (Note 3) ..........      29,735       28,603



Property and equipment, less accumulated
 depreciation of $2,608 and $2,596 ...................       3,227        3,899



Other assets .........................................      16,896       20,755
                                                          --------     --------










TOTAL ASSETS .........................................    $329,246     $262,274
                                                          ========     ========
</TABLE>





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


                                       37
<PAGE>   39

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
LIABILITIES AND                                        DECEMBER 31,   DECEMBER 31,
SHAREHOLDERS' EQUITY AS AT                                1998           1997     
--------------------------------------------------------------------------------
(Dollars in thousands)                                                 (Note 1)

<S>                                                      <C>          <C>
LIABILITIES
Notes and loans payable: (Note 6)
  Related parties ....................................   $  57,557    $  18,207
  Others .............................................      40,636        5,000
Debentures (Note 7) ..................................      32,817       41,846
Accounts and income taxes payable, accrued
 expenses and minority interests .....................      37,071       34,711
                                                         ---------    ---------

        Total liabilities ............................     168,081       99,764
                                                         ---------    ---------

SHAREHOLDERS' EQUITY (Note 8)
4% Cumulative Convertible Preferred Stock, $5
 par value; authorized 189,287 shares; issued and
 outstanding 172,238 and 179,672 shares ..............         861          898

6-1/2% Cumulative Convertible Preferred Stock,
 $5 par value; authorized 988,055 shares; issued
 and outstanding 925,279 and 968,288 shares ..........       4,626        4,842

Class A Stock, $1 par value; authorized
 60,000,000 shares; issued 24,684,822 and
 24,418,325 shares; outstanding 24,079,422
 and 23,812,925 shares ...............................      24,685       24,418

Additional paid-in capital ...........................      57,829       57,491

Retained earnings ....................................      90,615       88,775
Treasury Stock, 605,400 shares of Class A Stock,
 at cost .............................................      (3,829)      (3,829)
Accumulated other comprehensive loss .................     (13,622)     (10,085)
                                                         ---------    ---------

        Total shareholders' equity ...................     161,165      162,510
                                                         ---------    ---------





TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...........   $ 329,246    $ 262,274
                                                         =========    =========
</TABLE>




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


                                       38
<PAGE>   40

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                1998         1997         1996    
---------------------------------------------------------------------------------------
(Dollars in thousands)                                            (Note 1)     (Note 1)

<S>                                                 <C>          <C>          <C>
Cash flows from operating activities:
 Net income (loss) ..............................   $   2,175    $  14,183    $ (10,252)
 Adjustments to reconcile net income (loss) to
  net cash provided by operating activities:
  Equity in earnings of affiliates ..............      (7,328)     (18,703)      (6,333)
  Loss from discontinued operations .............          --           --        2,892
  Realized and unrealized losses (gains) on
  investments ...................................         568       (5,466)      (1,342)
  Gain on issuance of shares by affiliate .......      (1,032)          --           --
  Unrealized loss on rental property ............          --           --        1,095
  Depreciation expense ..........................       1,338        1,559        2,038
  Amortization expense ..........................       1,403        1,754        3,587
  Loss from impairment of investments ...........       1,890        2,185       10,083
  Restructuring charge ..........................          --        1,300           --
  Minority interests ............................      (1,345)        (220)        (551)
  Translation (gain) loss .......................        (623)          68         (143)
 Decrease (increase) in other assets ............       2,239          565       (3,158)
 (Decrease) increase in accounts and income
  taxes payable, accrued expenses and minority
  interests .....................................      (7,847)       4,742          (89)
 Investments made in trading securities .........     (30,838)      (9,143)      (2,391)
 Proceeds from sale of trading securities .......      11,333        8,359        3,254
 Dividends received from affiliates .............      26,245        9,719        1,806
                                                    ---------    ---------    ---------
  Net cash (used in)provided by operating
  activities ....................................      (1,822)      10,902          496
                                                    ---------    ---------    ---------
Cash flows from investing activities:
 Deposits, notes and loans receivable collected .      16,641       27,124       17,546
 Deposits, notes and loans receivable granted ...        (723)      (1,024)      (2,046)
 Investments made in:
  Available-for-sale securities .................          --           --         (228)
  Affiliates and others .........................    (119,844)     (11,159)     (11,497)
 Proceeds from sale of investments:
  Available for sale securities .................         353        1,537           --
  Affiliates and others .........................       1,294       25,212       14,934
 Real estate rental property-capital improvements      (2,895)      (1,034)      (2,475)
 Purchase of property and equipment .............        (333)      (1,182)        (380)
 Proceeds from sale of real estate rental
 property ......................................          --       15,059           --
                                                    ---------    ---------    ---------
  Net cash (used in) provided by investing
   activities ...................................    (105,507)      54,533       15,854
                                                    ---------    ---------    ---------
</TABLE>



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


                                       39
<PAGE>   41

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                              1998         1997         1996   
------------------------------------------------------------------------------------
(Dollars in thousands)                                           (Note 1)     (Note 1)
<S>                                                 <C>         <C>         <C>
Cash flows from financing activities:
 Notes and loans payable received:
  Related parties ...............................   $ 83,497    $  4,050    $  2,187
  Others ........................................     69,055         931       8,201
 Notes and loans payable repaid:
  Related parties ...............................    (44,251)    (20,091)     (4,866)
  Others ........................................    (32,976)     (6,184)     (1,950)
 Debentures repaid ..............................     (8,283)    (17,301)    (22,180)
 Contribution to partnership by minority
  interests .....................................      9,765          --          --
 Issuance of shares to related parties and others        352          --          --
 Dividends paid .................................       (335)       (351)       (364)
                                                    --------    --------    --------
  Net cash provided by (used in) financing
   activities ...................................     76,824     (38,946)    (18,972)
                                                    --------    --------    --------

Effect of exchange rate changes on cash and
 cash equivalents ...............................     (2,905)     (1,665)     (2,479)
                                                    --------    --------    --------

Net (decrease) increase in cash and cash
 equivalents ....................................    (33,410)     24,824      (5,101)
Cash and cash equivalents at beginning of year ..     45,457      20,633      25,734
                                                    --------    --------    --------

Cash and cash equivalents at end of year ........   $ 12,047    $ 45,457    $ 20,633
                                                    ========    ========    ========

Supplemental Disclosure of Cash Flow Information
Cash paid during the year:
 Interest:
  Related parties ...............................   $  1,941    $  1,257    $  2,384
  Others ........................................      2,721       2,820       3,309
                                                    --------    --------    --------
    Total interest paid .........................   $  4,662    $  4,077    $  5,693
                                                    ========    ========    ========

Income taxes paid ...............................   $  2,037    $    714    $  3,729
                                                    ========    ========    ========
</TABLE>




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


                                       40
<PAGE>   42

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                             1998         1997        1996   
------------------------------------------------------------------------------------
                                                               (Note 1)     (Note 1)
(Dollars in thousands, except share amounts
 and per share data)

<S>                                                <C>         <C>         <C>
4% PREFERRED STOCK
Balance, beginning of year .....................   $    898    $    955    $    995
Conversion of 7,434, 11,264 and  8,094 shares
 into Class A Stock ............................        (37)        (57)        (40)
                                                   --------    --------    --------
Balance, end of year ...........................   $    861    $    898    $    955
                                                   ========    ========    ========

6-1/2% PREFERRED STOCK
Balance, beginning of year .....................   $  4,842    $  5,012    $  5,263
Conversion of 43,009, 34,195 and 50,116 shares
 into Class A Stock ............................       (216)       (170)       (251)
                                                   --------    --------    --------
Balance, end of year ...........................   $  4,626    $  4,842    $  5,012
                                                   ========    ========    ========

CLASS A STOCK
Balance, beginning of year .....................   $ 24,418    $ 24,257    $ 21,066
Issuance of shares upon exchange of Common Stock         --          --       3,000
Issuance of shares upon conversion of
 Preferred Stock ...............................        167         158         191
Issuance of shares to related party (Note 9) ...        100          --          --
Issuance of additional shares ..................         --           3          --
                                                   --------    --------    --------
Balance, end of year ...........................   $ 24,685    $ 24,418    $ 24,257
                                                   ========    ========    ========

COMMON STOCK
Balance, beginning of year .....................   $     --    $     --    $  3,000
Exchange for Class A Stock .....................         --          --      (3,000)
                                                   --------    --------    --------
Balance, end of year ...........................   $     --    $     --    $     --
                                                   ========    ========    ========

ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year .....................   $ 57,491    $ 57,410    $ 57,310
Conversion of Preferred Stock ..................         86          69         100
Issuance of shares to related party (Note 9) ...        250          --          --
Issuance of additional shares ..................          2          12          --
                                                   --------    --------    --------
Balance, end of year ...........................   $ 57,829    $ 57,491    $ 57,410
                                                   ========    ========    ========

RETAINED EARNINGS
Balance, beginning of year .....................   $ 88,775    $ 74,943    $ 85,559
Net income (loss) ..............................      2,175      14,183     (10,252)
Dividends:
  4% Preferred Stock - $.20 per share ..........        (34)        (36)        (38)
  6-1/2% Preferred Stock - $.325 per share .....       (301)       (315)       (326)
                                                   --------    --------    --------
Balance, end of year ...........................   $ 90,615    $ 88,775    $ 74,943
                                                   ========    ========    ========
</TABLE>


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


                                       41
<PAGE>   43

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                              1998        1997        1996   
------------------------------------------------------------------------------------
                                                               (Note 1)     (Note 1)
(Dollars in thousands, except share amounts
 and per share data)

<S>                                                <C>         <C>         <C>      
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of year .....................   $(10,085)   $ (6,628)   $ (4,949)

Cumulative translation adjustments:
Balance, beginning of year .....................   $(10,085)   $ (6,530)   $ (4,354)
Foreign currency translation adjustment ........     (8,495)     (3,555)     (2,176)
                                                   --------    --------    --------
Balance, end of year ...........................   $(18,580)   $(10,085)   $ (6,530)
                                                   ========    ========    ========

Unrealized gain (loss) on marketable securities:
Balance, beginning of year .....................   $     --    $    (98)   $   (595)
Unrealized gain (loss), net ....................      4,958          98         (81)
Transfer to trading securities .................         --          --          67
Write-down due to permanent impairment .........         --          --         511
                                                   --------    --------    --------
Balance, end of year ...........................   $  4,958    $     --    $    (98)
                                                   --------    --------    --------

Balance, end of year ...........................   $(13,622)   $(10,085)   $ (6,628)
                                                   ========    ========    ========
</TABLE>




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


                                       42
<PAGE>   44


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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                              1998        1997         1996   
-----------------------------------------------------------------------------------
(Dollars in thousands)

<S>                                                <C>         <C>         <C>      
Net income (loss) ..............................   $  2,175    $ 14,183    $(10,252)
                                                   --------    --------    --------

Other comprehensive (loss) income, net of tax:
 Foreign currency translation adjustments ......     (8,495)     (3,555)     (2,176)
 Unrealized gain (loss) on securities ..........      4,958          98         (81)
                                                   --------    --------    --------
 Other comprehensive (loss) income .............     (3,537)     (3,457)     (2,257)
                                                   --------    --------    --------

 Comprehensive (loss) income ...................   $ (1,362)   $ 10,726    $(12,509)
                                                   ========    ========    ========

Related tax (expense) benefit of other 
  comprehensive (loss) income:
 Foreign currency translation adjustments ......   $  1,248    $    206    $    317
 Unrealized gain (loss) on securities ..........   $ (2,670)   $    (53)   $     42
</TABLE>








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


                                       43
<PAGE>   45


AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)


Note 1 - Summary of Significant Accounting Policies

(a)  The Company

     As used in these financial statements, the term the "Company" refers to
Ampal-American Israel Corporation ("Ampal") and its consolidated subsidiaries. A
substantial portion of the Company's operations involves transactions with Bank
Hapoalim B.M. ("Hapoalim"), the largest bank in Israel, and companies affiliated
or related thereto. At December 31, 1998, Hapoalim and its wholly-owned
subsidiary, Atad Hevra Lehashkaot Limited owned 24.4% of Ampal's outstanding
Class A Stock.

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

(b)  Consolidation

     The consolidated financial statements include the accounts of Ampal and its
subsidiaries. Certain prior year amounts have been reclassified to conform with
the current year's presentation.

     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. Goodwill, representing the excess of the purchase
price over the fair value of the net assets of the acquired entities, is being
amortized on a straight-line basis over the period of expected benefit of ten
years.

(c)  Translation of Foreign Currencies

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

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

(d)  Investments

     Marketable equity securities, other than equity securities accounted for by
the equity method, are reported at fair value. For those securities which are
classified as trading securities, unrealized gains and losses are reported in
the statement of income. Unrealized gains and losses from those securities which
are classified as available-for-sale are reported as a separate component of
shareholders' equity.

(e)  Property and Equipment

     The Company's policy is to record long-lived assets at cost, amortizing
these costs over the expected useful life of the related assets. These assets
are reviewed on a


                                       44
<PAGE>   46

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)


quarterly and annual basis for impairment whenever events or changes in
circumstances indicate that the carrying amounts of the assets may not be
recoverable. Furthermore, the assets are evaluated for continuing value and
proper useful lives by comparison to expected future cash flows.

(f)  Income Taxes

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

     Deferred income taxes are not provided on undistributed earnings of foreign
subsidiaries adjusted for translation effect totalling approximately $4.9
million, since such earnings are currently expected to be permanently reinvested
outside the United States. If the earnings were not considered permanently
invested, approximately $1.7 million of deferred income taxes would have been
provided. Deferred income taxes are provided on equity in earnings of
affiliates, and gains on issuances of shares by affiliates, and unrealized gains
on investments. Ampal's foreign subsidiaries file separate tax returns and
provide for taxes accordingly.

(g)  Cash Equivalents

     Cash equivalents include time deposits and notes receivable with maturities
at acquisition of 90 days or less.

(h)  Comprehensive income (loss):

     In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130 "Reporting Comprehensive Income". This statement establishes
rules for the reporting of comprehensive income and its components. Other
comprehensive income (loss) consists of cumulative translation adjustments and
unrealized gains (losses) on marketable securities presented net of income
taxes.

Note 2 - Discontinued Operations

     On December 23, 1996, the Company sold all of its equity interest in its
food processing subsidiary, Pri Ha'emek (Canned and Frozen Food) 88 Ltd. ("Pri
Ha'emek") to Agrifarm International Limited ("Agrifarm"), a British company. In
connection with the sale, the Company recorded a loss on disposition of $3.2
million and a tax benefit of approximately $3.9 million, which was based on a
total loss of its investment in Pri Ha'emek in the amount of $9.7 million.

     Accordingly, the results of Pri Ha'emek, were presented as discontinued
operations in the Company's 1996 consolidated financial statements.

Note 3 - Acquisitions and Dispositions

(a) On January 22, 1998 (the "Closing Date"), the Company completed its purchase
of a one-third interest in the assets of the shared networks operation ("SNO")
of Motorola Communications Israel, Ltd. ("Motorola Israel") for a base purchase
price of approximately $110 million. The payment for the purchase price was
obtained from the Company's own resources as well as from two short-term bridge
loans ("Short-Term Loans"), one in the amount of $40 million from Bank Leumi USA
(of which $8 million plus interest was repaid on February 2, 1998) and a second
in the amount of $35 million from Bank Hapoalim B.M. ("Hapoalim"). Each loan had
a term of 90 days, bore interest at a rate of LIBOR plus 1/2% and was repaid in
full from the proceeds of the long-term loans described below.

     A new wireless communications service provider, MIRS Communication Company
Ltd.("MIRS"), initially one-third owned by the Company and two-thirds owned by
Motorola Israel, coordinates and operates in Israel the digital and analog
public-shared two-way radio and other services previously furnished by Motorola
Israel. The digital wireless communication service is based on Motorola Israel's
iDEN(TM) integrated wireless


                                       45
<PAGE>   47

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)


communication technology, which is known as MIRS in Israel.

     In March 1998, the Company transferred its interest in MIRS to a limited
partnership (the "Partnership"). A wholly-owned Israeli subsidiary of Ampal (the
"General Partner") is the general partner of the Partnership and owns 75.1% of
the Partnership. The limited partners of the Partnership purchased their
interests in the Partnership from the Partnership and include (i) an entity
owned by Daniel Steinmetz and Raz Steinmetz (directors of Ampal and the
controlling persons of Ampal's principal shareholder), which acquired a 9.1%
interest in the Partnership for $10 million, (ii) Hapoalim, which acquired a
7.45% interest in the Partnership for $8.195 million, (iii) an unrelated third
party (The Israel Mezzanine Fund L.P., a limited partnership whose general
partner is First Israel Mezzanine Investors Ltd.), which acquired a 7.45%
interest in the Partnership for $8.195 million, and (iv) an entity owned by Dr.
Yehoshua Gleitman, Ampal's Chief Executive Officer, which purchased a 0.9%
interest for $1 million. In addition to the purchase price, the limited partners
also reimbursed the Company for their pro rata share of the expenses incurred by
the Company in connection with the original purchase from Motorola Israel
(including interest from the Closing Date until the purchase date of the limited
partnership interests).

     On May 4, 1998, the Partnership received two long-term loans from Hapoalim
and Bank Leumi Le'Israel B.M. in the amount of $36.4 million, each (see Note 6).
The proceeds from the long-term loans were used to repay the Short-Term Loans.

     The Partnership owns all of the authorized preferred shares of MIRS and
Motorola Israel owns all of the authorized ordinary shares. Each share issued by
MIRS is entitled to one vote.

     The Company accounts for its investment in MIRS using the cost method of
accounting. Under the cost method, the Company recognizes income from dividends
as they are declared.

     To the extent of available after-tax profits, MIRS is required to pay
dividends to the Partnership equal to at least $3.8 million for fiscal year 2000
and $7.1 million for each fiscal year thereafter, so long as the financial
stability of MIRS will not be impaired. MIRS shall endeavor to pay dividends in
the following amounts: for fiscal year 1998, $4.95 million, for fiscal year
1999, $10.725 million and for fiscal year 2000 and thereafter, $23.43 million
(inclusive of the required payments), which all holders of an interest in MIRS
shall share on a pro rata basis. To the extent that any of the above dividends
are not paid by MIRS, they will accumulate. No dividends will be paid by MIRS to
Motorola Israel until the Partnership has received all of its accumulated
dividends. Any dividends which are paid in excess of the above amounts for a
given fiscal year will similarly be paid pro rata to the Partnership and
Motorola Israel based on their shares in MIRS.

     Pursuant to the original purchase agreement, Motorola Israel guaranteed
that the Partnership would receive from MIRS at least $3.8 million for fiscal
year 2000 and $7.1 million for each fiscal year between 2001 and 2005 inclusive,
subject to an obligation of the Partnership to repay such guarantee payments in
amount equal to the excess of the amount actually received by the Partnership
from MIRS with respect to any subsequent year over $7.5 million.

     Motorola Israel has agreed to make certain payments to the Partnership in
the event that, prior to the thirteenth anniversary of the Closing Date, there
is a dissolution, liquidation, bankruptcy, winding up, or sale of all or
substantially all of the assets of MIRS and the total proceeds to the
shareholders of MIRS is less than $450 million.

     The $110 million base purchase price for the Partnership's one-third
interest in MIRS was based upon the Company's valuation of the SNO and its
prospects. The original purchase agreement provides that under specified
circumstances indicating that there has been an increase in the enterprise value
of MIRS, the Partnership must pay Motorola Israel an additional amount (the
"Bonus"). The formula for the Bonus varies depending upon 


                                       46
<PAGE>   48

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)


whether an initial public offering of MIRS' shares (an "IPO") has been
consummated. If an IPO is consummated prior to December 31, 2002, the
Partnership must pay Motorola Israel the Bonus based on an increase in the
valuation of MIRS for purposes of the IPO. In no event will such Bonus exceed
$33 million multiplied by 1.16n, where n represents the number of years (and any
part thereof) between the Closing Date and the closing of the IPO.

     If an IPO is not consummated prior to December 31, 2002 and if all
dividends accumulated with respect to the Partnership's preferred shares up to
that time have been paid, then the Partnership must pay Motorola Israel a Bonus
if (A) the present value of the actual after tax net income of MIRS (as reported
by MIRS' auditors in compliance with generally accepted accounting principles in
Israel, excluding capital gains derived from each transaction, not in the
ordinary course of business, in which the consideration for MIRS is more than $5
million) for fiscal years 1998 through 2002, discounted at the rate of 13%,
exceeds (B) $71 million. In this case, the amount of the Bonus, if any, will
equal the lesser of (i) the amount of such excess multiplied by 2.3376, or (ii)
$46 million.

     On March 21, 1999, MIRS declared a dividend, the Company's share of which
amounts to $.9 million (net of minority interest).

(b) In addition to the investment in MIRS, the Company made the following
investments in the high-technology field in the year ended December 31, 1998,
aggregating $7.3 million, notably; (1) a $2.5 million investment to acquire a 9%
interest in Smartlight Ltd., a developer and marketer of innovative digital film
viewers for use in the diagnosis of medical images; (2) a $2.1 million
investment to acquire an additional 8.6% of XaCCT Technologies Ltd. (total
equity interest - 18.4%), a developer of billing, auditing and accounting
software for TCP/IP networks; (3) a $1 million investment to acquire an
additional 3.8% of PowerDsine Ltd. (total equity interest - 11.9%, after
dilution), a developer, manufacturer and marketer of innovative modules and
components for the telecommunications industry; (4) a $1 million investment to
acquire a 1.75% equity interest in Compugen Ltd., a developer of algorithms and
models for the interpretation of biological processes; (5) a $.4 million
investment to acquire an additional 2% in its existing investee NetFormX Ltd.
(formerly Imagenet Ltd., - total equity interest 21%), a developer of CANER(C)
family of network design, analysis and simulation tools; and (6) $.3 million to
maintain its equity interest in its existing investee, Qronus Interactive Israel
(1994) Ltd., a developer and marketer of software testing tools.

(c) In 1997, the Company made several new investments in the high-technology
field aggregating $8.9 million, notably (1) a $1 million investment to acquire
7.3% of UNIC View Ltd., a manufacturer and marketer of a liquid screen display
projector for video, large-screen television and computer projection systems and
a developer of a new projector engine for home use, (2) a $.75 million
investment for 2.2% FundTech Ltd. (decreased to 1.5% in 1998), a developer of
software for worldwide banking institutions to facilitate fund transfers, (3) a
$1 million investment for 3% of NKO, Inc., a developer of low-cost facsimile
transmission services, (4) a $.4 million investment for approximately 9.8% of
XaCCT Technologies Ltd., a developer of billing, auditing and accounting
software for TCP/IP networks which allows such networks to generate reports of
network transactions and services by treating them exactly like telephone calls,
(5) a $2 million investment for 12.5% of PowerDsine, Ltd., a developer,
manufacturer and marketer of innovative modules and components for the
telecommunications industry, (6) a $.5 million investment for 24.99% of Ortek
Ltd., a developer and manufacturer of electro-optical devices and systems for
the military and civilian markets, (7) a $1.25 million investment to acquire
approximately 12% of Shiron Satellite Communications (1996) Ltd., a developer of
satellite modems which achieve high data rates, designed to answer the
requirements of satellite data and voice applications such as rural telephone,
video conferencing and other applications, and (8) a $2 million investment to
acquire 11% of Shellcase Ltd., an Israeli company which has developed a
packaging process for computer chips.

(d) On May 8, 1997, the Company sold all of its direct holdings in Orlite
Industries (1959) Ltd. ("Orlite") and a wholly-owned subsidiary which held a
separate interest in 


                                       47
<PAGE>   49

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)


Orlite to Investment Company of Bank Hapoalim for an aggregate sales price of
$5.3 million. The Company recorded a gain on sale of $.3 million with respect to
this transaction. 

(e) On February 27, 1997, the Company sold its 20.7% interest in Davidson-Atai
Publishers Ltd. ("Davidson Atai"), a publishing company, to principals of
Davidson Atai for approximately $.1 million. The transaction yielded a nominal
profit to the Company.

(f) On March 27, 1997, the Company sold its 7.9% interest in Idan Software
Industries I.S.I. Ltd. ("Idan"), to Idan's principal shareholder for
approximately $.9 million and recorded a gain on sale of approximately $.1
million with respect to this transaction.

(g) On January 31, 1997, the Company sold to the Government of Israel (the
"Government") the portion of the building at 800 Second Avenue, New York, New
York ("800 Second Avenue") which it occupies for $31 million. As a result of
this transaction, the Company recorded an unrealized loss of $1.1 million ($.6
million net of taxes) in its December 31, 1996 financial statements.

(h) In 1997 and 1996, the Company received gross proceeds in the amount of $3.6
million and $2 million from the sale of 119,800 and 113,624 shares of Teledata
Communications Ltd. ("Teledata") and realized gains on sale of $2.9 million and
$1.5 million ($1.9 and $1 million after taxes), respectively.

(i) In June 1996, the Company made a $1.5 million indirect investment in Geotek
Communications Inc., an international wireless telecommunications company. In
1997, the Company recorded a $1.2 million loss due to the impairment in value of
this investment.

(j) In September 1995, the Company invested $1.3 million to acquire a 21.9%
equity interest and three-year options to acquire an additional 4.4% equity in
U.D.S. - Ultimate Distribution Systems Ltd. ("U.D.S."), an Israeli-based
software company specializing in the management and optimization of a variety of
logistic tasks for the distribution industry. In 1997, the Company recorded a $1
million loss from impairment of value of this investment and U.D.S. will no
longer be accounted for as an affiliate of the Company under the equity method
of accounting.

Note 4 - Deposits, Notes and Loans Receivable

     Deposits, notes and loans receivable earn interest at varying rates
depending upon their linkage provisions. The deposits are guaranteed by
Hapoalim. Deposits have maturities of up to 7 years and notes and loans
receivable have maturities of up to 10 years. At December 31, 1998 and 1997,
deposits, notes and loans receivable from related parties were $26.5 million and
$36.7 million, respectively.

Note 5 - Investments in Marketable Securities

     The Company classifies investments in marketable securities as trading
securities and available-for-sale securities and periodically re-evaluates such
classifications.

(a)  Trading Securities

     The cost and market values of trading securities at December 31, 1998 and
1997 are as follows:

<TABLE>
<CAPTION>
                                                         Unrealized      Market 
December 31, 1998                            Cost      Gains/(Losses)     Value
                                            ------------------------------------
<S>                                         <C>           <C>            <C>    
Bonds ...............................       $   333       $  (143)       $   190
Equity Securities ...................        29,543        (3,446)        26,097
                                            -------       -------        -------

Total Trading Securities ............       $29,876       $(3,589)       $26,287
                                            =======       =======        =======
</TABLE>


                                       48

<PAGE>   50


AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                         Unrealized      Market 
December 31, 1997                            Cost      Gains/(Losses)     Value
-----------------                           ------------------------------------
<S>                                         <C>           <C>            <C>    
Bonds ...............................       $   479       $  (122)       $   357
Equity Securities ...................         5,433         1,663          7,096
                                            -------       -------        -------

Total Trading Securities ............       $ 5,912       $ 1,541        $ 7,453
                                            =======       =======        =======
</TABLE>

     In the years ended December 31, 1998, 1997 and 1996, the Company recorded
$(1.4) million, $.9 million, and $(.1) million of unrealized gains (losses),
respectively, on trading securities in the statement of income.

     During 1998, 1997 and 1996, the Company invested approximately $30.8
million, $9.1 million, and $2.4 million, respectively, in marketable securities,
which are classified as trading securities.

(b)  Available-For-Sale Securities

     At December 31, 1998, the aggregate fair value of available-for-sale
securities was $3.3 million (cost - $.6 million). In 1997, the Company did not
have any available-for-sale securities.

     In the year ended December 31, 1996, the Company recorded an unrealized
loss on available-for-sale securities in the statement of income of $.5 million,
as a result of the permanent impairment in value.

Note 6 - Notes and Loans Payable

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

     At December 31, 1998 and 1997, notes and loans payable include a $15
million note payable to Hapoalim, borrowed in connection with the purchase of
the building located at 800 Second Avenue, New York, New York. The loan is due
on May 28, 1999 and bears interest at the rate of LIBOR plus .75%, or 5.97% at
December 31, 1998 (at December 31, 1997 the rate was LIBOR plus .5%, or 6.44%).

     On May 4, 1998, the Company received two long-term loans from Hapoalim and
Bank Leumi Le' Israel B.M. in the amount of $36.4 million each, in connection
with the purchase of the preferred shares of MIRS (see Note 3(a)). Both loans
are due on March 31, 2008 and bear interest at a rate of LIBOR plus .8%. The
principal payments are due as follows: 10% on March 31, 2004, 15% on March 31,
2005 and 25% on each of the following dates - March 31, 2006, 2007 and 2008.
Interest will be paid annually on March 31 of each year from March 31, 2001
until and including March 31, 2008.

     The weighted average interest rates on the balances of short-term
borrowings at year-end are as follows: 6.58% on $20.6 million and 6.59% on $2.5
million in 1998 and 1997, respectively.



                                       49

<PAGE>   51


AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)


Note 7 - Debentures

Debentures outstanding at December 31 consist of:

<TABLE>
<CAPTION>
                                                               1998       1997
                                                              ------------------
<S>                                                           <C>        <C>
Ampal:
Fifteen Year 11% Discount Debenture, maturing 2003
(in 1997, various series with interest rates ranging
from 10%-12%, maturing 1999-2003) ........................    $18,075    $20,306



Ampal Development (Israel) Ltd.:
 Various series with interest rates ranging from
 6.2%-7.5%, linked to the Consumer Price Index in
 Israel, maturing 1999-2005, secured by assets of
 $22 million .............................................     21,208     29,211
                                                              -------    -------
                                                               39,283     49,517

Less: Unamortized discounts ..............................      6,466      7,671
                                                              -------    -------
Total ....................................................    $32,817    $41,846
                                                              =======    =======
</TABLE>


     Certain debentures are presentable for early redemption. If presented for
early redemption, maturities (including required obligations) for the five years
ending December 31 would be:

<TABLE>
<S>                                                          <C>     
1999.............................                            $16,437*
2000.............................                              6,203
2001.............................                              1,852
2002.............................                              1,851
2003.............................                              1,851
Thereafter.......................                              3,792
</TABLE>

*    If no debentures are presented for early redemption, scheduled maturities
     will amount to $5,569.

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, 1998, a total of 8,710,277 shares
of Class A Stock is reserved for issuance upon the conversion of the Preferred
Stock and the exercise of 4.5 million warrants, 473,250 options and 100,000
rights. The warrants expired on January 31, 1999.

     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, 1998, there are no dividend arrearages.

Retained Earnings

     At December 31, 1998, retained earnings include $43 million for affiliates
accounted for by the equity method, of which $11.2 million and an additional
$37.3 million from subsidiaries is not available for the payment of dividends.
In most cases this results from Israeli requirements that dividends may only be
paid on the basis of shekel-denominated and not dollar-denominated retained
earnings.

Note 9 - Stock Options

     In September 1994, the Company's shareholders approved a Stock Option Plan
(the "1994 Plan") permitting the granting of options to purchase up to an
aggregate of 200,000 shares of Class A Stock to employees, officers and
directors of the Company and certain subsidiaries of the Company. The options
granted under the 1994 Plan may be either incentive stock options, at an
exercise price of not less than (i) the fair market value of the underlying
shares on the date of grant, or (ii) 110% of the fair market value on the date
of grant if the grantee owns stock representing more than 10% of the voting

                                      50
<PAGE>   52

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)


power of Ampal's capital stock or value of all classes of stock of Ampal, or
non-incentive stock options, at an exercise price that is fixed by the Board of
Directors (the "Board") or the Stock Option Committee (the "Committee") at the
time the options are granted. The options are exercisable at the discretion of
the Board or the Committee, with a non-exercisable period of at least two years
from the date of grant for all options granted except those granted to
non-employee directors, which may be exercised immediately upon grant. The terms
of options granted under the 1994 Plan may not exceed five years. As of December
31, 1998, there were 35,750 options outstanding under the 1994 Plan, presently
exercisable at $10.91 per share.

     In March 1998, the Board approved a Long-Term Incentive Plan (the "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 options granted may be either
incentive stock options, at an exercise price to be determined by 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 1998 Plan remains in effect for a
period of ten years.

     Also in March 1998, the Company entered into a Stock Option and Stock
Purchase Agreement ("the Agreement") with the Company's Chief Executive Officer.
Pursuant to the Agreement, the Chief Executive Officer was granted options to
purchase up to 1,000,000 shares of the Company's Class A Stock. The Company also
granted, based on certain terms and conditions, the rights to purchase ("Share
Purchase Rights"), at a discount, up to 200,000 shares of the Company's Class A
Stock.

     The Company accounts for all plans under APB Opinion No. 25, under which
compensation cost has been recognized for the year-ended December 31, 1998 for
the 20% discount in connection with the Share Purchase Rights. Had compensation
cost for these options been determined in accordance with SFAS No. 123, the
Company's net income and EPS would have been reduced as follows:

<TABLE>
<CAPTION>
(In thousands, except per share data)                                   Year Ended December 31,
                                                                 ---------------------------------------
                                                                 1998             1997             1996
                                                                 ----             ----              ----
<S>                                                             <C>             <C>              <C>      
Net income (loss):  As reported..............                   $2,175          $ 14,183         $(10,252)
                    Pro forma................                    1,201               --                --

Basic EPS:          As reported..............                    $.08              $.58             $(.45)
                    Pro forma................                     .04                --                --

Diluted EPS:        As reported..............                    $.07              $.50             $(.45)
                    Pro forma................                     .03                --                --
</TABLE>

     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 used for the options: (1) expected life of options
of 7.95 years; (2) dividend yield of 0%; (3) expected volatility of 40%; and (4)
risk-free interest rate 5.72%.

     Because SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.



                                      51
<PAGE>   53


AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)


Transactions under both Stock Option Plans and Agreement during 1998 were as
follows:

<TABLE>
<CAPTION>
(In thousands, except per share data)
                                                    Year Ended December 31, 1998              
                                           --------------------------------------------
                                                        Weighted               Weighted
                                            Share        Average                Average
                                           Purchase     Exercise               Exercise
                                            Rights        Price    Options       Price   
                                           --------------------------------------------
<S>                                           <C>       <C>          <C>        <C>   
Outstanding at beginning of year ........       --          --         109      $10.91
Granted .................................      200          (1)      1,000      $ 8.75
Exercised ...............................     (100)     $ 2.80          --          --
Terminated ..............................       --          --         (73)     $10.91
                                            ------                   ------
Outstanding at end of year ..............      100          (1)      1,036      $ 8.82
                                            ======                   ======
                                                                               
Exercisable at end of year ..............       --          --         473     
                                                                    ======     
Weighted average fair value of                                                 
 options granted ........................                                       $ 2.23
                                                                                ======
</TABLE>
                                                                             
(1) Pursuant to the Stock Option and Purchase Agreement, exercise price to be
determined based on 80% of the market price of the shares purchased on the date
of exercise.

     The 1,036,000 options outstanding as of December 31, 1998 have exercise
prices between $6.75 and $10.91 with a weighted average exercise price of $8.82
and a weighted average remaining contractual life of 7.2 years. Of these
1,036,000 options, 473,000 are exercisable; their weighted average exercise
price is $8.91.

Note 10 - Earnings Per Class A Share

     Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings
Per Share." In accordance with SFAS No. 128, net earnings per Class A share
("basic EPS") were computed by dividing net earnings by the weighted average
number of Class A shares outstanding and excluded any potential dilution. Net
earnings per Class A share amounts, assuming dilution ("diluted EPS") were
computed by reflecting potential dilution from the conversion of the 4% and
6-1/2% Preferred Stocks into Class A Stock (in 1996 these securities were
excluded as they were antidilutive). SFAS No. 128 requires the presentation of
both basic EPS and diluted EPS on the face of the income statement.

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


<TABLE>
<CAPTION>
(In thousands, except per share data)

                                                      Year Ended December 31, 1998 
                                                     -------------------------------
                                                                           Per Share
                                                      Income      Shares    Amounts   
                                                     -------------------------------
<S>                                                  <C>          <C>         <C>
Basic EPS:
 Net income attributable to Class A Stock .......    $1,840(1)    23,911      $.08
                                                     ======                   ====
                                                                             
Effect of Dilutive Securities:                                               
 Conversion of 4% and 6-1/2% Preferred                                       
Stocks ..........................................                  3,713      
                                                                  ------      
                                                                             
Diluted EPS:                                                                 
 Net income attributable to Class A Stock .......    $1,841(2)    27,624      $.07
                                                     ======       ======      ====
</TABLE>


                                      52

<PAGE>   54


AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                     Year Ended December 31, 1997 
                                                   ---------------------------------
                                                                           Per Share
                                                    Income        Shares    Amounts
                                                   ---------------------------------
<S>                                                <C>            <C>       <C>
Basic EPS:
 Net income attributable to Class A Stock .....    $13,832(1)     23,742    $   .58
                                                   =======                  =======

Effect of Dilutive Securities:
 Conversion of 4% and 6-1/2% Preferred
Stocks ........................................                    3,873
                                                                 -------

Diluted EPS:
 Net income attributable to Class A Stock .....    $13,925(2)     27,615    $   .50
                                                   =======       =======    =======
<CAPTION>
                                                      Year Ended December 31, 1996
                                                   ---------------------------------
                                                                           Per Share
                                                    Income        Shares    Amounts
                                                   ---------------------------------
<S>                                                <C>            <C>       <C>
Basic and Diluted EPS:
Loss from continuing operations ...............    $(7,724)(1)    23,549(3) $  (.33)
Loss from discontinued operations .............     (2,892)                    (.12)
                                                   --------                 -------
Net income attributable to Class A Stock ......    $(10,616)                $  (.45)
                                                   ========                 =======
</TABLE>

(1) After deduction of Preferred Stock dividends of $335, $351 and $364,
respectively. 

(2) Includes decrease in net income of $334 and $258, respectively, due to
dilution in equity in earnings of affiliate.

(3) Includes 2,769 shares of Common Stock.

Note 11 - Income Taxes

<TABLE>
<CAPTION>
The components of current and deferred
income tax expense (benefit) are:                    1998       1997        1996
                                                  ------------------------------
<S>                                               <C>        <C>        <C>
Current:
 State and local ..............................   $    66    $    66    $    65
 Federal ......................................       280      2,945        912
 Foreign ......................................     1,136      2,859        999
Deferred:
 State and local ..............................      (132)       (95)      (214)
 Federal ......................................    (3,137)       716        (60)
 Foreign ......................................    (1,734)    (1,180)       197
                                                  -------    -------    -------
    Total .....................................   $(3,521)   $ 5,311    $ 1,899
                                                  =======    =======    =======

The components of deferred income tax expense
(benefit) are:

Equity in earnings of affiliates ..............    (3,477)    1,218       404
Net operating loss carryforwards ..............      (985)      (204)      (577)
Unrealized  (losses) gains ....................    (1,230)      (516)       336
Restructuring charge ..........................       245       (455)        --
Other .........................................       444       (602)      (240)
                                                  -------    -------    -------
   Total ......................................   $(5,003)   $  (559)   $   (77)
                                                  =======    =======    =======
</TABLE>



                                      53
<PAGE>   55


AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                      1998        1997         1996
                                                  ---------------------------------
<S>                                               <C>         <C>         <C>
The domestic and foreign components of (loss)
income from continuing operations before income
taxes are:

Domestic ......................................   $ (5,806)   $   (363)   $ (1,894)
Foreign .......................................      4,460      19,857      (3,567)
                                                  --------    --------    --------
   Total ......................................   $ (1,346)   $ 19,494    $ (5,461)
                                                  ========    ========    ========

A reconciliation of income taxes between the
statutory and effective tax is as follows:

Federal income tax at 35%, 35% and 34% ........   $   (471)   $  6,823    $ (1,857)
Taxes on foreign income (below) in excess of
  U.S. rate, net of tax credits ...............     (2,856)     (1,366)      4,040
Other .........................................       (194)       (146)       (284)
                                                  --------    --------    --------
Total effective tax: 262%, 27% and (35%) ......   $ (3,521)   $  5,311    $  1,899
                                                  ========    ========    ========
</TABLE>

Other assets include approximately $5.1 million ($3.6 million in 1997) of
deferred tax assets which primarily represent the tax benefit of the temporary
differences between the carrying values of the assets in the financial
statements and their income tax bases. Accounts and income taxes payable and
accrued expenses include approximately $20.9 million ($22.7 million in 1997) of
deferred tax liability which primarily consists of tax liability provided on
undistributed earnings of affiliates of approximately $20.2 million ($23.3 
million in 1997).

Note 12 - Investments in Affiliates and Others

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

<TABLE>
<CAPTION>
                                                           1998      1997    1996     
                                                          -----------------------
<S>                                                          <C>     <C>     <C>
Am-Hal Ltd. ............................................     50%     50%     50%
Bay Heart Limited (a) ..................................     37      37      37
Carmel Containers Systems Limited ......................     20.7    20.7    20.7
Coral World International Limited (b)...................     50      50      50
Epsilon Investment House Ltd. ..........................     20      20      20
Hod Hasharon Sport Center (1992) Limited
 Partnership ...........................................     50      50      50
Granite Hacarmel Investments Limited ("Granite") .......     19.1    21.5    21.5
M.D.F. Industries Ltd.(c) ..............................     --      --      --
Moriah Hotels Ltd. .....................................     46      46      46
Ophir Holdings Ltd.(d) .................................     42.5    42.5    42.5
Orlite Industries (1959) Ltd. ("Orlite")
 (See Note 3(d)) .......................................     --      --      25.3
Ortek Limited (24.99% is also owned by a related
 party)(e) .............................................     --      24.99   --
Renaissance Investment Company Ltd. ....................     20      20      20
Trinet Investment in High-Tech Ltd. ....................     37.5    37.5    37.5
Trinet Venture Capital Ltd.(f) .........................     50      50      50
U.D.S. - Ultimate Distribution Systems Ltd. 
 (See Note 3(j)) .......................................     --      --      21.9
</TABLE>



                                      54
<PAGE>   56


AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)


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

<TABLE>
<CAPTION>
                                                    1998       1997       1996   
                                                  ------------------------------
<S>                                               <C>        <C>        <C>     
Revenues ......................................   $672,816   $776,034   $788,169
Gross profit ..................................    184,483    204,992    184,533
  Net income ..................................     31,587     53,083     36,346

Property and equipment ........................   $348,226   $332,514   $356,901
Other assets ..................................    508,501    500,670    503,255
                                                  --------   --------   --------
  Total assets ................................   $856,727   $833,184   $860,156
                                                  ========   ========   ========

Total liabilities, including bank borrowings ..   $602,807   $516,627   $546,457
                                                  ========   ========   ========
</TABLE>

(a) At December 31, 1998 and 1997, the Company had a note receivable from Bay
Heart Limited in the amount of $.4 million and $1 million, respectively, and
recorded interest income in the amount of $44 and $339, respectively, for the
above years.

(b) On September 27, 1996, a wholly-owned subsidiary of Coral World
International Limited ("CWI"), the Company's 50%-owned affiliate, sold its
marine park in Nassau (Bahamas) to an unrelated party for $3.75 million and CWI
recorded a loss on sale of approximately $5 million (the Company's share is $2.5
million, $1.7 million net of taxes). In addition, in May 1996, CWI's management
made a decision to sell its marine park in St. Thomas (U.S. Virgin Islands), and
CWI recorded a loss of approximately $2 million (the Company's share is $1
million, $.7 million net of taxes) to adjust the carrying value of its
investment to net realizable value. In April 1997, CWI sold this investment to
an unrelated party for $.8 million and recorded a gain of $.1 million.

     At December 31, 1998 and 1997, the Company had a note receivable from CWI
in the amount of $.1 million and $.3 million and recorded interest income in the
amount of $31 and $49, respectively, for the above years.

(c) M.D.F. Industries Ltd. ("M.D.F."), the Company's 50%-owned affiliate, which
established a plant in Israel for the production of medium density fiber boards,
and which completed its running-in period on June 30, 1996, incurred significant
losses in 1996. The losses were primarily attributable to the excess of cost of
sales per production unit over the selling price. In view of the substantial
losses incurred by M.D.F. and the continuing depressed prices with respect to
its products, the Company believed that further substantial losses would be
incurred by M.D.F. Consequently, because of the uncertainty with respect to
M.D.F.'s future operations, the Company recorded a loss from impairment of this
investment in December 1996 for its full remaining investment in and loans to
M.D.F. in the amount of $8.8 million. This loss, in addition to the $1.3 million
loss previously recorded by the Company in 1996 with respect to M.D.F., resulted
in a total loss attributable to the operations of M.D.F. in the amount of $8.6
million, net of tax benefits. M.D.F. is no longer accounted for as an affiliate
of the Company under the equity method of accounting, however, the Company
continues to be contingently liable with respect to $5 million of guarantees
given by the Company with respect to M.D.F.'s bank obligations.

(d) At December 31, 1996, the Company had a note receivable from Ophir in the
amount of $4.5 million which matured in 1997 and recorded interest income in the
amount of $56 in 1997 and $178 in 1996. Also at December 31, 1996, the Company
had a non-interest bearing note payable to Ophir in the amount of $1.2 million,
which matured on January 1, 1997.

(e) At December 31, 1998, the Company recorded a loss from impairment of its
investment in Ortek Limited ("Ortek") in the amount of $.3 million ($.2 million
net of taxes). The Company no longer accounts for Ortek under the equity method
of accounting. However, the Company continues to be contingently liable for $.6
million of guarantees given by the Company to Ortek.



                                      55
<PAGE>   57


AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)


(f) At December 31, 1998 and 1997, the Company had a non-interest bearing note
receivable from Trinet Venture Capital Ltd. in the amount of $2.5 million and
$3.6 million, respectively.

     The carrying value of the Company's investments in shares of its publicly
traded affiliates and others (including investments held through Ophir Holdings
Ltd.) at December 31, 1998, amounted to $38.1 million and had a market value of
$51.2 million, based upon quoted market prices of shares traded on the American
Stock Exchange, NASDAQ National Market and the Tel Aviv Stock Exchange. There is
no assurance that any of these investments could be realized at the quoted
market price.

Note 13 - Segment Information

     The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," at December 31, 1998. SFAS 131 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.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                 1998            1997             1996     
--------------------------------------------------------------------------------
<S>                                <C>             <C>             <C>
Revenues:
Finance ........................   $   7,341       $  16,738       $  15,154
Real estate rental .............       7,375           8,080          11,405
Mattress manufacturing .........       6,758          12,129          10,892
Leisure-time ...................       1,652           1,667           1,671
Intercompany adjustments .......        (503)         (1,204)         (1,095)
                                   ---------       ---------       ---------
     Total .....................   $  22,623       $  37,410       $  38,027
                                   =========       =========       =========

Equity in Earnings (Losses) of
  Affiliates:
Finance ........................   $     186(b)    $  15,228(b)    $   2,278(b)
Real estate rental .............         510(b)         (882)(b)      (3,362)(b)
Mattress manufacturing .........          --              --              --
Leisure-time ...................         775(a)          472(a)       (2,336)(a)
                                   ---------       ---------       ---------
     Total .....................   $   1,471       $  14,818       $  (3,420)
                                   =========       =========       =========

Interest Income:
Finance ........................   $   5,768       $  10,183       $  12,948
Real estate rental .............          61             908              36
Mattress manufacturing .........          --              --              --
Leisure-time ...................          --              --              --
Intercompany adjustments .......        (503)         (1,360)         (1,110)
                                   ---------       ---------       ---------
     Total .....................   $   5,326       $   9,731       $  11,874
                                   =========       =========       =========

Interest Expense:
Finance ........................   $  10,500       $   7,314       $  10,980
Real estate rental .............       1,483           2,375           3,110
Mattress manufacturing .........         314             453             346
Leisure-time ...................         523             481             755
Intercompany adjustments .......        (503)         (1,360)         (1,110)
                                   ---------       ---------       ---------
     Total .....................   $  12,317       $   9,263       $  14,081
                                   =========       =========       =========

Pretax Operating (Loss) Income:
Finance ........................   $  (9,991)      $  (1,199)      $ (12,076)
Real estate rental .............       2,341           2,433           1,855(c)
Mattress manufacturing .........      (2,015)           (264)         (1,516)
Leisure-time ...................        (354)           (400)           (608)
                                   ---------       ---------       ---------
     Total .....................   $ (10,019)      $     570       $ (12,345)
                                   =========       =========       =========
</TABLE>


                                      56
<PAGE>   58
\

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)

<TABLE>
<S>                                <C>             <C>             <C>
Income Tax (Benefit) Expense:
Finance ........................   $  (2,904)      $   5,542       $   2,448
Real estate rental .............        (319)           (229)           (524)
Mattress manufacturing .........          --              --             (25)
Leisure-time ...................        (298)             (2)             --
                                   ---------       ---------       ---------
     Total .....................   $  (3,521)      $   5,311       $   1,899
                                   =========       =========       =========

Total Assets:
Finance ........................   $ 292,333       $ 227,356       $ 230,318
Real estate rental .............      35,013          48,869          62,745
Mattress manufacturing .........       4,769           8,809           8,520
Leisure-time ...................       2,614           2,831           3,262
Intercompany adjustments .......      (5,483)        (25,591)        (21,294)
                                   ---------       ---------       ---------
     Total .....................   $ 329,246       $ 262,274       $ 283,551
                                   =========       =========       =========

Investments in Affiliates:
Finance ........................   $      --       $      --       $      --
Real estate rental .............      15,697(b)       13,724(b)        8,902(b)
Mattress manufacturing .........          --              --              --
Leisure-time ...................      33,943(a)       34,638(a)       34,489(a)
                                   ---------       ---------       ---------
     Total .....................   $  49,640       $  48,362       $  43,391
                                   =========       =========       =========

Capital Expenditures:
Finance ........................   $      19       $     190       $      48
Real estate rental .............       2,895           1,035           2,475
Mattress manufacturing .........         276             893             262
Leisure-time ...................          38              98              70
                                   ---------       ---------       ---------
     Total .....................   $   3,228       $   2,216       $   2,855
                                   =========       =========       =========

Depreciation and Amortization:
Finance ........................   $   1,346       $   1,675       $   3,476
Real estate rental .............         848             756           1,291
Mattress manufacturing .........         332             620             581
Leisure-time ...................         215             262             277
                                   ---------       ---------       ---------
     Total .....................   $   2,741       $   3,313       $   5,625
                                   =========       =========       =========
</TABLE>

     Corporate office expense is principally applicable to the financing
operation and has been charged to that segment above. Revenues and pretax
operating income above exclude equity in earnings of affiliates and minority
interests. Total assets exclude assets from discontinued operations.

     (a) Operations in Australia, Bahamas (1997 and 1996, only), Israel, U.S.
Virgin Islands (1997 and 1996, only) and the United States (see Note 11).

     (b) Operations in Israel.

     (c) Includes loss and gain on sale of real estate rental property (see Note
3).

     The real estate rental segment consists of rental property owned in Israel
and the United States leased to related and unrelated parties. The mattress
manufacturing segment consists of Paradise Industries, Ltd., which is a leading
manufacturer and distributor of mattresses and fold-out beds in Israel, whose
customer base consists of independent stores as well as hotel chains. The
leisure-time segment consists primarily of Moriah Hotels Ltd. (hotel chain in
Israel), Coral World International Limited (marine parks located around the
world) and Country Club Kfar Saba (the Company's 51%-owned subsidiary located in
Israel).

Note 14 - Disclosures about Fair Value of Financial Instruments

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



                                      57
<PAGE>   59


AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)


(a)  Cash and Cash Equivalents

     For short-term investments, the carrying amount is a reasonable estimate of
fair value.

(b)  Deposits, Notes and Loans Receivable

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

(c)  Investments

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

(d)  Commitments

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

(e)  Deposits, Notes and Loans Payable and Debentures

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

<TABLE>
<CAPTION>
                                            1998                    1997         
                                    ---------------------   --------------------
                                    Carrying     Fair       Carrying      Fair
                                     Amount      Value       Amount       Value 
                                    --------    --------    --------    --------
<S>                                 <C>         <C>         <C>         <C>     
Financial assets:

Cash and cash equivalents ......    $ 12,047    $ 12,047    $ 45,457    $ 45,457
Deposits, notes and loans
 receivable ....................      27,816      26,535      46,176      44,480
Investments ....................      29,553      29,553       7,453       7,453
                                    --------    --------    --------    --------
                                    $ 69,416    $ 68,135    $ 99,086    $ 97,390
                                    ========    ========    ========    ========

Financial liabilities:

Notes and loans payable ........    $ 98,193    $102,141    $ 23,207    $ 22,317
Debentures outstanding .........      32,817      33,556      41,846      43,157
                                    --------    --------    --------    --------
                                    $131,010    $135,697    $ 65,053    $ 65,474
                                    ========    ========    ========    ========
</TABLE>

Note 15- Commitments and Contingencies

(a) The combined minimum annual lease payments on Paradise, Ampal's corporate
offices, and Country Club Kfar Saba, without giving effect to future
escalations, are $.8 million for the years 1999-2003, and $8 million in the
aggregate, thereafter, totalling $12 million. The leases expire in 2006, 2009
and 2038, respectively.

(b) For the years 1999 through 2003, the combined minimum lease receipts to be
received by the Company from rental properties are approximately $5.6 million in
1999 ($2.4 million from related parties); $5.2 million in 2000 ($2 million from
related parties); $3.3 million in 2001 ($.3 million from related parties); $3.2
million in 2002 ($.1 million from related parties); $3 million in 2003 (all from
non-related parties); and $16.3 million in the aggregate, thereafter (all from
non-related parties), totalling $36.7 million ($4.8 million from related
parties).


                                      58

<PAGE>   60


AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)


(c) The Company has issued guarantees on bank loans to its investees and
subsidiaries totalling $12.2 million (includes $5 million of guarantees with
respect to M.D.F.).

     The Company's commitments to its investees amounted to $13 million.

(d) Sonol, a subsidiary of the Company's investee, Granite, and "Delek" the
Israel Fuel Corporation Ltd. ("Delek") jointly own the rights to the "Dalkan
2000," a computerized system for marketing fuel products (primarily to
automobile fleets). On January 26, 1997, the Controller of Restrictive Trade
Practices ruled that the joint marketing arrangement of the "Dalkan 2000" system
by Sonol and Delek is a restrictive trade agreement. As a result of the position
taken by the Controller, both Sonol and Delek agreed to divide the "Dalkan 2000"
system between themselves so that each company will operate an independent
system in a manner that will enable customers, in accordance with their own
preference, to enter into an agreement with either of the companies. The
separation agreement was implemented during 1998.

     A private legislative proposal dealing with the shortening of the terms of
exclusive agreements entered into between the fuel marketing companies and
filling station owners and operators has passed its first reading in the
Knesset, the Israeli parliament. The Economics Committee of the current Knesset
has decided that the rule of "Continuity" will be in effect regarding this
proposal and to initially require the legislation of rules regarding future
commitments of the fuel companies with filling station owners and only,
thereafter, to deal with the issue of exclusive agreements entered into in the
past. Subsequently, the Law of the Fuel Economy (Promotion of Competition
Correction) 1998, was enacted in July, 1998. The Law deals with future
commitments by the fuel companies and empowers the Minister of National
Infrastructures to determine rules after consulting with the Controller of
Restrictive Trade Agreements and after having received approval by the Economics
Committee of the Knesset, regarding automatic filling systems (Dalkanim and
Pazomatim) and their operation. These rules will apply to all the fuel
companies.

     A draft proposal of legislation by the Ministry of Energy and
Infrastructure regarding the term of exclusive contracts between the fuel
marketing companies and station owners has been forwarded to government
ministries, the President of the Supreme Court and law faculties for their
initial comments.

     As part of the Ministry of Energy's policy to separate the holding of
Emergency Inventories of crude oil and product inventories from the companies'
operating inventories, the Fuel Authority has designated several tanks at
various storage locations for the holding of Emergency Inventories, effective as
of July 1, 1998. Furthermore, a tender offer has been published to determine the
party which will hold the Emergency Inventories, which have to date been held by
the major fuel marketing companies. The final date for the tender has been
postponed.

     At this time, it is too early to estimate the effects of the said
developments on the overall Israeli fuel market in general, and on Granite in
particular.

(e) On July 27, 1998, a Tel Aviv District Court judge ruled in favor of Yakhin
Hakal Ltd., the manager and co-owner of Ampal's 50%-owned affiliates, Etz Vanir
Ltd. ("Etz Vanir") and Yakhin Mataim Ltd. ("Yakhin Mataim"). The judge's
decision allows Etz Vanir and Yakhin Mataim to redeem debentures owned by Ampal
for approximately $.8 million and to require Ampal to surrender all of its
shares of Etz Vanir and Yakhin Mataim for their par value, which is nominal.
After the redemption and surrender, Ampal will no longer have any interest in
Etz Vanir or Yakhin Mataim.

     Etz Vanir and Yakhin Mataim cultivate in the aggregate approximately 1,200
acres of citrus groves.

     Etz Vanir and Yakhin Mataim have not reported their financial results to
Ampal since 1990 and, therefore, their financial results have not been included
in Ampal's financial statements. The carrying value of Ampal's investment in Etz
Vanir and Yakhin Mataim, as of December 31, 1998, is approximately $.8 million.


                                      59

<PAGE>   61


AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)


     At the request of Ampal's attorneys, the Tel Aviv District Court has issued
a stay of performance of the judgment until the High Court of Appeal issues a
final judgment. On October 15, 1998, Ampal filed an appeal with the High Court
of Appeal in Jerusalem. It is not expected that a final judgment will be
rendered before the end of 1999.

     (f) Legal claims arising in the normal course of business have been filed
against subsidiaries and affiliates of the Company. In the opinion of the
companies' managements, based on the opinions of legal counsel, the provisions
made are sufficient.

Note 16 - Restructuring Charge

     During 1997, in connection with management's plan to reorganize operations
and reduce costs, the Company recorded a restructuring charge of $1.3 million
($.7 million was recorded in the quarter ended December 31, 1997). This
restructuring resulted in the elimination of certain corporate positions and was
completed in 1998, and primarily related to severance and other employee-related
costs. At December 31, 1998, $.6 million of the restructuring charge remained
unutilized and was transferred to severance and other employee-related
liability.

Note 17 - Subsequent Events

     On January 25, 1999, the Company accepted a tender from Koor Tourism
Enterprises (which tendered, jointly with the Sheraton International chain) for
the acquisition of the Radison Moriah Hotels chain ("Moriah"), the Company's
46%-owned affiliate, for $37.5 million. This transaction was approved by 
Israel's Anti-Trust Commissioner. If the aforementioned transaction is
consummated, the Company will record a gain on sale in the amount of
approximately $12.4 million ($8 million, net of income taxes). In the event that
Moriah distributes dividends prior to the completion of the sale, the sales
price will be adjusted by the amount of the dividends received.

     Hapoalim approached Ampal to commence negotiations regarding the potential
purchase by Ampal and its subsidiaries of Hapoalim's entire holdings in Ampal.
In connection with the proposed transaction, Ampal's Related Party Transactions
Committee approved on March 22, 1999 to continue the negotiations with Hapoalim
to acquire the entire Hapoalim holdings in Ampal in exchange for consideration
consisting of cash and certain real estate properties currently leased to
Hapoalim.

                                      60
<PAGE>   62

SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)

<TABLE>
<CAPTION>
                                                        First          Second             Third           Fourth
                                                       Quarter        Quarter            Quarter          Quarter            Total 
                                                     -------------------------------------------------------------------------------
                                                                       (Dollars in thousands, except per share data)
<S>                                                  <C>             <C>                <C>             <C>                <C>     
Year Ended December 31, 1998
Revenues .....................................       $  9,833        $  7,232           $  4,792        $  8,094           $ 29,951
Net interest (expense) .......................         (1,246)         (1,448)            (1,672)         (2,625)            (6,991)
Manufacturing operations .....................            (86)           (856)              (410)           (372)            (1,724)
Net income (loss) ............................          2,006            (919)            (1,902)          2,990              2,175
Basic EPS:
 Earnings (loss) per Class A share ...........            .08            (.03)              (.08)            .11(2)             .08
Diluted EPS:
 Earnings (loss) per Class A share ...........            .07            (.04)              (.07)            .11                .07




Year Ended December 31, 1997
Revenues .....................................       $ 12,470        $ 18,347(1)        $ 15,896        $  9,401           $ 56,114
Net interest income (expense) ................            215             281                (13)            (15)               468
Manufacturing operations .....................             (9)           (440)              (330)            337               (442)
Net income ...................................          2,521           4,769              4,608           2,285             14,183
Basic EPS:
 Earnings per Class A share ..................            .11             .20                .19             .08(2)             .58
Diluted EPS:
 Earnings per Class A share ..................            .09             .17                .16             .08                .50
</TABLE>

(1)  Restated to reclassify the loss from impairment of investment.

(2)  After deduction of preferred stock dividends of $335 and $351,
     respectively.



                                       61

<PAGE>   63

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     None

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

                                   MANAGEMENT

     The following table sets forth certain information regarding Ampal's
directors and executive officers:

<TABLE>
<CAPTION>
Name                                                               Position
----                                                               --------
<S>                                                                <C>
Daniel Steinmetz(1)..............................................  Chairman of the Board of Directors and Director
Raz Steinmetz(1).................................................  Chairman of the Executive Committee and Director
Yehoshua Gleitman(1).............................................  Chief Executive Officer
Shlomo Meichor*..................................................  Vice President-Finance and Treasurer
Alla Kanter......................................................  Vice President-Accounting and Controller
Eli S. Goldberg..................................................  Vice President-Legal and Secretary
Michael Arnon(2)(3)(4)...........................................  Director
Benzion Benbassat................................................  Director
Yaacov Elinav(1).................................................  Director
Kenneth L. Henderson(2)(3)(4)(5).................................  Director
Hillel Peled(2)(3)(4).............................................  Director
Shimon Ravid.....................................................  Director
</TABLE>

-----------
*    Mr. Meichor assumed the positions of Vice President-Finance and Treasurer
     of Ampal effective April 1, 1998.

     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. Mr. R.
     Steinmetz is the Chairman of the Executive Committee. Dr. Gleitman is a
     member of the Executive Committee ex officio.

(2)  Member of the Audit Committee of the Board which reviews functions of the
     outside auditors, auditors' fees and related matters. Mr. Arnon is the
     Chairman of the Audit Committee.

(3)  Member of the Related Party Transactions Committee of the Board which
     reviews and passes upon the fairness of business transactions between Ampal
     and related parties. Mr. Peled is the Chairman of the Related Party
     Transactions Committee.

(4)  Member of the Stock Option Committee of the Board which administers Ampal's
     1993 Stock Option Plan and other grants of options. For a description of
     Ampal's 1993 Stock Option Plan, see "Executive Compensation - Stock Option
     Plan." Mr. Henderson is the Chairman of the Stock Option Committee.

(5)  Mr. Henderson was a member of the Board and the indicated Committees from
     January 1, 1998 until he resigned from the Board in May, 1998. He was
     reappointed to the Board (and the indicated Committees) on December 9,
     1998.



                                      62

<PAGE>   64

     In 1998, the Board of Directors met four times and did not act by written
consent; the Executive Committee met twice and acted by written consent three
times; the Audit Committee met twice and did not act by written consent; the
Related Party Transactions Committee met twice and acted by written consent
once; and the Stock Option Committee met twice and did not act by written
consent. Ampal does not have a nominating committee or compensation committee.
All directors attended more than 75% of the aggregate of (1) the total number of
Board of Directors meetings held during the period in 1998 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 1998 (during the
period of such service).

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

     Daniel Steinmetz, 61, has managed family diamond trading businesses in
Israel for more than the past five years. Mr. Steinmetz is the father of Raz
Steinmetz.

     Raz Steinmetz, 35, has managed various investments for his family,
including real estate, financial investments and others, since September 1994.
From September 1993 through September 1994, he worked as a trainee at Republic
National Bank of New York. From September 1991 through July 1993, he attended
the University of Pennsylvania, Wharton Business School, where he received a
Masters Degree in Business Administration. He became a director of Ampal in June
1996 and Chairman of the Executive Committee in December 1996. Mr. Steinmetz is
the son of Daniel Steinmetz.

     Yehoshua Gleitman, 49, has been Chief Executive Officer of Ampal since May
1997 and Managing Director of Ampal (Israel), head of Ampal's Israeli
operations, since April 1, 1997. From August 1996 until February 1997, he was a
Director General of the Israeli Ministry of Industry and Trade. He was the Chief
Scientist at the Ministry of Industry and Trade from January 1993 until February
1997. Prior to his tenure with the Ministry of Industry and Trade, Mr. Gleitman
was Director General of AIMS Limited, a trading company.

     Shlomo Meichor, 41, assumed the duties of Vice President-Finance and
Treasurer of Ampal on April 1, 1998. For more than the past five years, Mr.
Meichor was the Finance and Operations Manager of Digital Semi-Conductors
Israel, a semi-conductor subsidiary of Digital Equipment Corporation.

     Alla Kanter, 41, has been Vice President-Accounting of Ampal since
September 1995 and Controller of Ampal since August 1990.

     Eli S. Goldberg, 44, has been Vice President-Legal and Secretary of Ampal
since November 1998. From September 1996 until November 1998, he was an
associate at Lowenstein, Sandler P.C. From November 1990 until July 1996, he was
employed as Special Assistant to the General Counsel of the Market Transition
Facility of New Jersey.

     Michael Arnon, 74, was Chairman of the Board of Directors of Ampal from
November 1990 to July 1994. From July 1986 until November 1990, he was President
and Chief Executive Officer of Ampal. He became a director of Ampal in 1986.

     Benzion Benbassat, 61, has been the President and Chief Executive Officer
of D.R.B. Investments Ltd., an investment company, controlled by Daniel
Steinmetz and Raz Steinmetz, directors of Ampal and the controlling persons of
Ampal's principal shareholder for more than the past five years. 

     Yaacov Elinav, 54, has been a Senior Deputy Managing Director of Hapoalim
since August 1992. From October 1991 to August 1992, he was a Deputy Managing
Director of Hapoalim. From October 1988 to October 1991, he was head of the
Corporate Division of Hapoalim. He became a director of Ampal in 1992.

     Kenneth L. Henderson, 44, is an attorney and has been a partner at Robinson
Silverman Pearce Aronsohn & Berman LLP ("Robinson") since 1987. Robinson
provided legal services to Ampal during 1997.

     Hillel Peled, 51, has been President of Inveco International, Inc., a
private investment company, since January 1990. From January 1982 to June 1986,
he served as Vice President-Finance and Treasurer of Ampal. He became a director
of Ampal in June 1996.



                                      63

<PAGE>   65

     Shimon Ravid, 62, has been a Joint Managing Director of Hapoalim since
February 1994. From October 1989 until February 1994, he was a Senior Deputy
Managing Director of Hapoalim. He became a director of Ampal in 1990.

             Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities Exchange Act of 1934, as amended requires
Ampal's officers and directors, and persons who own more than 10% of a
registered class of Ampal's equity securities, to file reports of ownership and
changes in ownership with the SEC and the American Stock Exchange. These persons
are required by regulation of the SEC to furnish Ampal with copies of all
Section 16(a) forms they file.

     Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, Ampal believes that during 1998 Ampal's officers,
directors and greater than 10% beneficial owners complied with all applicable
Section 16(a) filing requirements.



                                       64

<PAGE>   66


ITEM 11. EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE

         The table below presents information regarding remuneration paid or
accrued for services to Ampal and its subsidiaries by the executive officers
named below during the three fiscal years ended December 31, 1998, 1997, and
1996.

<TABLE>
<CAPTION>
                                                            Annual Compensation
                                           -----------------------------------------------------
           Name and Principal                                                       Other Annual          All Other
                Position                   Year         Salary        Bonus         Compensation         Compensation
                --------                   ----         ------        -----         ------------         ------------
<S>                                        <C>          <C>           <C>               <C>                <C>        
Yehoshua Gleitman(1)                       1998         $247,060                        $23,118(2)         $65,552(3) 
 (Chief Executive Officer)                 1997          179,756                         23,843(2)          37,444(4) 


Raz Steinmetz(5)                           1998          144,002                          7,417(2)          33,559(6) 
 (Chairman of the Executive Committee)     1997          100,342                          5,599(2)          21,219(7) 


Shlomo Meichor(8)                          1998          122,795                          9,735(2)           31,869(9)
 (Vice President-Finance
  and Treasurer)


Alla Kanter(10)                            1998          107,310        9,000                               14,362(11)
 (Vice President-Accounting                1997           82,525                                             9,229(12)
 and Controller)                           1996           82,400                                             9,366(13)


Lawrence Lefkowitz(14)                     1998          159,732                          6,739(2)         442,743(15)
 (President)                               1997          221,324                          8,720(2)          33,203(16)
                                           1996          220,851       16,335             8,123(2)          28,800(17)


Miri Lent Sharir(18)                       1998          159,578                          4,695(2)         247,869(19)
 (Assistant Vice President-Israel          1997          132,418       29,880                               29,842(20)
  Operations)                              1996          120,272                                            27,363(21)
</TABLE>


-----------
(1)  Dr. Gleitman was appointed Chief Executive Officer of Ampal on May 28,
     1997. Effective April 1, 1997, he was named Managing Director of Ampal
     (Israel). Dr. Gleitman is employed by Ampal pursuant to an employment
     agreement dated May 28, 1997. His salary is $247,060 (payable in Shekels)
     per annum, (plus benefits and the use of a company car), adjusted annually
     in accordance with changes in the United States consumer price index. Dr.
     Gleitman is paid by Ampal (Israel). Either party may terminate this
     agreement upon three months written notice for each year of Dr. Gleitman's
     employment up to a maximum of nine months. On November 18, 1998, Dr.
     Gleitman exercised his rights to purchase 100,000 of Ampal's Class A shares
     at 80% of its value based on the 30 day average sales price on that date.
     In connection with this purchase, on December 28, 1998, Dr. Gleitman
     received a loan from the Company in the amount of $210,000, at a variable
     interest rate equal to LIBOR (5.25% as of December 31, 1998); interest
     payable quarterly. The loan matures prior to the year 2001. Additionally,
     Dr. Gleitman has obtained two loans aggregating $250,000 from the Company.
     One loan, in the amount of $150,000, has a term of 10 years, an interest
     rate of LIBOR plus .8% and is without recourse to Dr. Gleitman. The second
     loan, in the amount of $100,000, has a term of 10 years, an interest rate
     of LIBOR plus .5% and is with recourse to Dr. Gleitman.

(2)  Consists of amounts reimbursed for the payment of taxes.



                                       65

<PAGE>   67
(3)  Comprised of Ampal (Israel)'s contribution pursuant to: (i) Ampal
     (Israel)'s Pension Plan of $39,070, (ii) Ampal (Israel)'s education fund of
     $18,511 and (iii) use of a car of $7,971.

(4)  Comprised of Ampal (Israel)'s contribution pursuant to: (i) Ampal
     (Israel)'s Pension Plan of $23,962 and (ii) Ampal (Israel)'s education fund
     of $13,482.

(5)  Mr. Steinmetz is employed by Ampal Industries (Israel) Limited, an indirect
     wholly-owned subsidiary of Ampal, on a part-time basis pursuant to an
     employment agreement effective as of January 1, 1997. Mr. Steinmetz is
     entitled to receive a salary of $175,000 (payable in Shekels) per annum
     (plus benefits), the total for 1998 was $144,000. His agreement can be
     terminated by either party upon thirty days notice.

(6)  Comprised of Ampal (Israel)'s contribution to: (i) Ampal (Israel)'s Pension
     Plan of $22,778 and (ii) Ampal (Israel)'s education fund of $10,781.

(7)  Comprised of Ampal (Israel)'s contribution to: (i) Ampal (Israel)'s Pension
     Plan of $13,579 and (ii) Ampal (Israel)'s education fund of $7,640.

(8)  Mr. Shlomo Meichor has been employed by Ampal since March 1, 1998 and was
     appointed Vice President-Finance and Treasurer of Ampal, effective April 1,
     1998. Pursuant to an employment agreement, dated March 5, 1998, Mr. Meichor
     receives a base salary of $144,000 per annum, adjusted annually in
     accordance with the United States consumer price index (payable in Shekels)
     plus benefits and use of a car. His agreement can be terminated upon two
     months' notice and after the two months' notice period expires Mr. Meichor
     is entitled to receive his salary for an additional four months.

(9)  Comprised of Ampal (Israel)'s contribution pursuant to: (i) Ampal
     (Israel)'s Pension Plan of $19,323, (ii) Ampal (Israel)'s education fund of
     $9,155 and (iii) use of a car of $3,391.

(10) Ms. Kanter has been Vice President-Accounting of Ampal since September 1995
     and Controller of Ampal since August 1990.

(11) Comprised of Ampal's contribution pursuant to: (i) Ampal's Pension Plan of
     $10,873; and (ii) Ampal's Savings Plan of $3,489.

(12) Comprised of Ampal's contribution pursuant to: (i) Ampal's Pension Plan of
     $6,753; and (ii) Ampal's Savings Plan of $2,476.

(13) Comprised of Ampal's contribution pursuant to: (i) Ampal's Pension Plan of
     $6,893; and (ii) Ampal's Savings Plan of $2,473.

(14) Mr. Lefkowitz resigned as President and Director of Ampal on March 26, 1998
     but continued as an employee of Ampal until September 1998.

(15) Comprised of Ampal's contribution pursuant to: (i) Ampal's Pension Plan of
     $19,788; (ii) accrued vacation benefit of $58,605; (iii) use of a car of
     $8,819 and a severance payment of $355,531. See "Other Benefits" below for
     a description of such plans.

(16) Comprised of Ampal's contribution pursuant to: (i) Ampal's Pension Plan of
     $16,592; (ii) Ampal's Supplementary Executive Retirement Plan of $12,111
     and (iii) Ampal's Savings Plan of $4,500.

(17) Comprised of Ampal's contribution pursuant to: (i) Ampal's Pension Plan of
     $15,476; (ii) Ampal's Supplementary Executive Retirement Plan of $8,899 and
     (iii) Ampal's Savings Plan of $4,425.

(18) Ms. Sharir resigned as Vice President-Israel Operations on August 6, 1998.

(19) Comprised of Ampal (Israel)'s contribution to: (i) Ampal (Israel)'s Pension
     Plan of 


                                      66
<PAGE>   68

     $12,942, (ii) Ampal (Israel)'s education fund of $6,143 and a severance
     payment of $228,784.

(20) Comprised of Ampal (Israel)'s contribution to: (i) Ampal (Israel)'s Pension
     Plan of $20,899 and (ii) Ampal (Israel)'s education fund of $8,943.

(21) Comprised of Ampal (Israel)'s contribution to: (i) Ampal (Israel)'s Pension
     Plan of $19,239 and (ii) Ampal (Israel)'s education fund of $8,124.


                                      67
<PAGE>   69

                          FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                                          Number of Securities Underlying Unexercised
                                                                                 Options at Fiscal Year-End(1)
                                                                          -------------------------------------------
Name                                                                         Exercisable               Unexercisable
----                                                                      ----------------           ----------------
<S>                                                                              <C>                       <C>    
Yehoshua Gleitman...............................................                 437,500                   562,500
Raz Steinmetz...................................................                       0                         0
Shlomo Meichor..................................................                       0                         0
Alla Kanter.....................................................                   8,000(2)                      0
Lawrence Lefkowitz..............................................                       0                         0
Miri Lent Sharir.......................................................                       0                         0
</TABLE>

-----------
(1)  This represents the total number of shares of Class A Stock subject to
     stock options held by the named executive officer at December 31, 1998.

(2)  Represents options which expired January 24, 1999.

     At the June 9, 1998 annual meeting of Ampal's shareholders (the "Effective
Date"), Ampal's shareholders approved the grant of options and purchase rights
to Dr. Yehoshua Gleitman, Ampal's Chief Executive Officer. The terms of the
options approved by the shareholders is as follows:

<TABLE>
<CAPTION>
No. of Options                              Exercise Price                              Term      
--------------------------------------------------------------------------------------------------
<S>                                         <C>                                         <C>       
200,000                                     $6.75                                       4.25 years
300,000                                     $8                                          7 years
500,000                                     $10                                         10 years
</TABLE>

     One-fourth (plus an additional one-sixteenth) of all such options vest
immediately and the remaining options will vest at a rate of one-sixteenth of
the total number of options every three months until March 2001. The options for
200,000 shares with an exercise price of $6.75 will expire four years and three
months after the Effective Date; the options for 300,000 shares with an exercise
price of $8 will expire on the seventh anniversary after the Effective Date; and
the options for 500,000 shares with an exercise price of $10 will expire on the
tenth anniversary after the Effective Date. All options that have not vested
prior to Dr. Gleitman ceasing to be an employee of Ampal or its subsidiary will
terminate and not be exercisable. Dr. Gleitman will then have the greater of (i)
two time the length of any applicable termination notice period and (ii) 30 days
to exercise vested options. Dr. Gleitman was granted the right to exercise his
options through a cashless exercise of options.

     Dr. Gleitman was also granted the right to purchase up to 200,000 shares of
Class A Stock at a price equal to 80% of the average closing sales prices of the
Class A Stock during the 30 days prior to the exercise of the particular
purchase right. The purchase rights vest and terminate in blocks of 50,000. In
November 1998, Dr. Gleitman exercised purchase rights to acquire 100,000 shares
of Class A Stock.

Other Benefits

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

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



                                      68

<PAGE>   70

<TABLE>
<CAPTION>
                                                              Vested
Years of Service                                            Percentage
----------------                                            ----------
<S>                                                            <C>
less than 2 years......................................          0%
2 but less than 3 years................................         20%
3 but less than 4 years................................         40%
4 but less than 5 years................................         60%
5 but less than 6 years................................         80%
6 or more years........................................        100%
</TABLE>

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

     Ampal maintains a savings plan (the "Savings Plan") for its eligible
employees pursuant to Section 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code"). Eligible employees are all employees of Ampal except
non-resident aliens, night-shift employees and employees represented by a
collective bargaining unit. Participation by employees in the Savings Plan is
voluntary. Participating employees may direct that a specific percentage of
their annual compensation (up to 15%) be contributed to a self-directed 401(k)
savings account. The amount which any employee could contribute to his or her
401(k) savings account in 1998 was limited under the Code to $10,000. Effective
January 1, 1996, the Savings Plan was amended so that Ampal matches 50% of each
employee's contribution up to a maximum of 3% of the employee's compensation.
Employees who were eligible to participate in the Savings Plan as of December
31, 1995 are 100% vested at all times in the account balances maintained in
their 401(k) savings account. Employees who became eligible to participate in
the Savings Plan on or after January 1, 1996 become vested in amounts
contributed by Ampal depending on the number of years of service, as provided in
the following table:



                                      69

<PAGE>   71



<TABLE>
<CAPTION>
                                                               Vested
Years of Service                                             Percentage
----------------                                             ----------
<S>                                                             <C>
less than 2 years......................................           0%
2 but less than 3 years................................          20%
3 but less than 4 years................................          40%
4 but less than 5 years................................          60%
5 but less than 6 years................................          80%
6 or more years........................................         100%
</TABLE>

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

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

Compensation of Directors

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

Stock Option Plan

     In November 1993, the Board approved a stock option plan (the "Stock Option
Plan") which provides for grants of options to purchase up to 200,000 shares of
Ampal Class A Stock in the aggregate to employees, officers and directors of
Ampal and certain subsidiaries of Ampal. Options granted under the Stock Option
Plan may be either options which are intended to qualify as "incentive stock
options" within the meaning of Section 422 of the Code ("ISOs"), or options that
are not intended to so qualify ("Non-ISOs"). The Stock Option Plan was approved
by Ampal's shareholders on September 22, 1994.

     The Stock Option Plan is administered by the Board or by a Stock Option
Committee thereof (the "Committee") consisting exclusively of directors who are
not to be granted options under the Stock Option Plan. The Board (or the
Committee) determines, subject to the terms of the Stock Option Plan, the
individuals to whom options are to be granted and the terms of the options,
including the exercise price, number of shares subject to each option, whether
the option is to qualify as an ISO and the vesting of rights to exercise each
option. Currently, the Stock Option Committee is administered by a committee
consisting of Mr. Arnon, Mr. Henderson (Chairman) and Mr. Peled.

     The exercise price of each ISO granted under the Plan must not be less than
the fair market value of the shares on the date of grant or 110% of the fair
market value on the date of grant if the ISO grantee owns stock representing
more than 10% of the voting power of Ampal's capital stock or value of all
classes of stock of Ampal or a subsidiary corporation. The exercise price of
each Non-ISO granted under the Stock Option Plan, which may be less than fair
market value on the date of grant, will be fixed by the Board (or the Committee)
at the time the Non-ISO is granted.

     The Board (or the Committee) shall determine the dates on which each option
shall be exercisable and the conditions precedent to such exercise. However, all
options, other than those granted to non-employee directors of Ampal, may not be
exercisable prior to the second anniversary of their date of grant. Options
granted to non-employee directors of Ampal shall be exercisable immediately upon
grant. The terms of options granted under the Stock Option Plan may not exceed
five years.



                                      70

<PAGE>   72

     To the extent that a grant of options results in the aggregate fair market
value of the shares of Class A Stock with respect to which ISOs are exercisable
for the first time by an optionee during any calendar year exceeds $100,000,
such options are treated as Non-ISOs.

     Pursuant to an amendment to the Stock Option Plan, dated March 23, 1994,
optionees may pay the exercise price or their withholding tax obligation with
the shares of Class A Stock which are to be delivered upon exercise.

     In January 1994, pursuant to the Stock Option Plan, Non-ISO Options to
purchase 134,900 shares of Class A Stock were granted to employees, officers and
directors of Ampal and certain subsidiaries of Ampal. Currently, options to
purchase 35,750 shares of Class A Stock remain outstanding not including options
granted to Dr. Gleitman.

     In March 1998, the Board approved a Long-term Incentive Plan (the "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 options granted may be either
incentive stock options, at an exercise price to be determined by 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 1998 Plan remains in effect for a
period of ten years.

     Also in March 1998, the Company entered into a Stock Option and Stock
Purchase Agreement ("the Agreement") with the Company's CEO. Pursuant to the
Agreement, the CEO was granted options to purchase up to 1,000,000 shares of the
Company's Class A Stock. The Company also granted, based on certain terms and
conditions, the rights to purchase ("Share Purchase Rights" ), at a discount, up
to 200,000 shares of the Company's Class A Stock.

           Compensation Committee Interlocks and Insider Participation

     During 1998, members of the Executive Committee of the Board of Directors
which functions as the compensation committee of Ampal included: Mr. Daniel
Steinmetz; Mr. Yaacov Elinav, Senior Deputy Managing Director of Hapoalim; and
Mr. Raz Steinmetz (Chairman). For a description of business transactions between
Ampal and Hapoalim and between Ampal and the Steinmetz group, see "Certain
Relationships and Related Party Transactions."

Item 12. Security Ownership of Certain Beneficial Ownership and Management

                         Principal Shareholders of Ampal

     The following table sets forth information as of March 18, 1999 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. For purposes of computation of
the percentage ownership of Class A Stock set forth in the table, conversion of
any 4% Cumulative Convertible Preferred Stock (the "4% Preferred Stock") and 6
1/2% Cumulative Convertible Preferred Stock (the "6 1/2% Preferred Stock") owned
by such beneficial owner has been assumed, without increasing the number of
shares of Class A Stock outstanding by amounts arising from possible conversions
of convertible securities held by shareholders other than such beneficial owner.
As at March 18, 1999, there were outstanding 24,114,062 (not including treasury
shares) shares of Class A Stock of Ampal. In addition, there were outstanding
920,186 non-voting shares of 6 1/2% Preferred Stock (each convertible into 3
shares of Class A Stock) and 171,305 non-voting shares of 4% Preferred Stock
(each convertible into 5 shares of Class A Stock).



                                      71

<PAGE>   73

Security Ownership of Certain Beneficial Owners

<TABLE>
<CAPTION>
Name and Address                                     Title of                         Amount and Nature           Percent
of Beneficial Owner                                   Class                        of Beneficial Ownership        of Class
-------------------                                   -----                        -----------------------        --------
<S>                                               <C>                                 <C>                          <C>  
Daniel Steinmetz................................  Class A Stock                       11,083,712 shs. (1)          46%  
Rebar Financial Corp.
c/o Icaza, Gonzalez-Ruiz
& Aleman (BVI) Ltd.
Wickhams Cay, Road Town,
Tortola, British Virgin Islands

Raz Steinmetz...................................  Class A Stock                       11,083,712 shs. (1)          46%  
Rebar Financial Corp.
c/o Icaza, Gonzalez-Ruiz
& Aleman (BVI) Ltd.
Wickhams Cay, Road Town,
Tortola, British Virgin Islands

Rebar Financial Corp............................  Class A Stock                       11,083,712 shs. (1)          46%  
c/o Icaza, Gonzalez-Ruiz
& Aleman (BVI) Ltd.
Wickhams Cay, Road Town,
Tortola, British Virgin Islands

Bank Hapoalim B.M...............................  Class A Stock                        6,258,639 shs. (2)          25.5%
50 Rothschild Blvd.
Tel Aviv, Israel
</TABLE>

-----------
(1)  Consists of 11,083,712 shares of Class A Stock held directly by Rebar, as
     reported by Mr. Daniel Steinmetz, Mr. Raz Steinmetz and Rebar on Amendment
     to Form 4, dated February 1, 1999, filed with the SEC. Mr. Raz Steinmetz is
     the President of Rebar and Mr. Daniel Steinmetz is the Vice President. They
     are the sole directors of Rebar and beneficially own, directly and
     indirectly, 96% and 4% of the outstanding equity of Rebar, respectively.
     Certain of the shares of Class A Stock held by Rebar have been pledged to
     The First International Bank of Israel Ltd.

(2)  As reported by Hapoalim on Amendment No. 34 to Schedule 13-D, dated
     December 18, 1996, filed with the SEC. These shares represent all of the
     shares owned directly by its wholly-owned subsidiary Atad. Assumes
     conversion of 122,536 shares of 6 1/2% Preferred Stock and 3,350 shares of
     4% Preferred Stock.

Security Ownership of Management

     The following table sets forth information as of March 18, 1999 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 ownerships are direct unless otherwise
     noted. The table does not include directors or named executive officers who
     do not own any such shares:



                                      72

<PAGE>   74

<TABLE>
<CAPTION>
                                                                                             
                                                           AMOUNT AND NATURE OF   PERCENT OF OUTSTANDING 
                                                           BENEFICIAL OWNERSHIP          SHARES OF        
NAME                                                        OF CLASS A STOCK           CLASS A STOCK       
----                                                        ----------------           -------------       
<S>                                                             <C>                             <C>
Yehoshua Gleitman......................................            537,500(1)                    2%
Lawrence Lefkowitz.....................................             32,375(2)                     *
Daniel Steinmetz.......................................         11,083,712(3)                   46%
Raz Steinmetz..........................................         11,083,712(3)                   46%
All Directors and Executive Officers as a Group........         11,669,087(4)                   48%
                                                                                                
</TABLE>

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

(1)  Includes 100,000 shares of Class A Stock acquired in November 1998 upon Dr.
     Gleitman's exercise of purchase rights and 437,500 options to purchase
     shares of Class A Stock which are currently exercisable.

(2)  Includes 23,100 shares of Class A Stock held by a trust under an estate as
     to which Mr. Lefkowitz is co-personal representative. Mr. Lefkowitz
     resigned as President and Director of Ampal effective March 26, 1998 and
     continued to be an employee of Ampal until the expiration of his employment
     agreement in September 1998.

(3)  Attributable to 11,083,712 shares of Class A Stock held directly by Rebar.
     See "Security Ownership of Certain Beneficial Owners."

(4)  Includes options to purchase 437,500 shares of Class A Stock which are
     currently exercisable.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Board of Directors of Ampal maintains a Related Party Transactions
Committee comprised of independent directors which reviews and passes upon the
fairness of any business dealings and arrangements (other than borrowings on
then prevailing market terms or deposits made in the ordinary course of
business) between Ampal and any affiliated party. With certain exceptions, Ampal
may not enter into transactions with any officer, director or principal
shareholder of Ampal, without first obtaining the approval of the Related Party
Transactions Committee or a majority of the disinterested members of the Board
of Directors or the shareholders.

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

     Ampal borrows and receives deposits from Hapoalim and its subsidiaries.
During 1998, the largest amount of such indebtedness outstanding at any one time
was $65,487,000 and interest expense thereon was $4,817,000. Additionally, Ampal
makes loans to and maintains deposits with Hapoalim and its subsidiaries. The
largest amount of such loans and deposits at any one time during 1998 was
$62,958,000 and interest income thereon was $3,422,000. As of December 31, 1998,
the amount of borrowings from Hapoalim and its subsidiaries was $57,557,000 and
the amount of loans to and deposits with Hapoalim and its subsidiaries was
$22,549,000. In 1998, Ampal borrowed $3 million from Hapoalim under a committed
line of credit. Borrowings under this line of credit bear interest at a variable
rate of interest equal to LIBOR plus .5%. Such loans and borrowings are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unaffiliated third
persons and, in the opinion of the management of Ampal, do not involve more than
normal risk of collectibility or present other unfavorable features.

     In connection with the Company's investment in MIRS, the Company borrowed
$35 million from Hapoalim. The loan ("Short-Term Loan") had a term of 90 days
and bore interest at a rate of LIBOR plus .5%. On May 4, 1998, the Company
received a long-term loan from Hapoalim in the amount of $36.4 million. The loan
is due on March 31, 2008 and bears interest at a rate of LIBOR plus 0.8%. The
principal payments are due as follows: 10% on March 31, 2004, 15% on March 31,
2005 and 25% on each of the following dates - March 31, 2006, 2007 and 2008.
Interest will be paid annually on March 31 of each year from March 31, 2001
until and including March 31, 2008. The proceeds from the long-term loan was
used to repay the Short-Term Loan.

     In March 1998, the Company transferred its interest in MIRS to a limited
partnership (the "Partnership"). A wholly-owned Israeli subsidiary of Ampal (the
"General Partner") is the general partner of the Partnership and owns 75.1%
of the Partnership. The limited partners of the Partnership purchased their
interests in the Partnership from the Partnership and include (i) an entity
owned by Daniel Steinmetz and Raz Steinmetz (directors of Ampal and the
controlling persons of Ampal's principal shareholder), (ii) Hapoalim, (iii) an
entity owned by Dr. Yehoshua Gleitman, Ampal's Chief Executive Officer and (iv)
an unrelated third party. The related parties purchased their limited
partnership interests 


                                      73

<PAGE>   75

on the same terms as an unrelated third party which were determined through
arm's length negotiations between the Company and the unrelated third party. A
portion of Dr. Gleitman's entity's purchase price was obtained through two loans
aggregating $250,000 from the Company. One loan, in the amount of $150,000, has
a term of 10 years, an interest rate of LIBOR plus .8% and is without recourse
to Dr. Gleitman. The second loan, in the amount of $100,000, has a term of 10
years, an interest rate of LIBOR plus .5% and is with recourse to Dr. Gleitman.
Both loans are secured by Dr. Gleitman's interest in the Partnership.

     On November 18, 1998, Dr. Gleitman exercised his rights to purchase 100,000
Class A shares at 80% of its value based on the 30 day average sales price on
that date. In connection with that purchase, on December 28, 1998, Dr. Gleitman
received a loan from the Company in the amount of $210,000, at a variable
interest rate equal to LIBOR (5.25% as of December 31, 1998); interest payable
quarterly. The loan matures prior to the year 2001.

     Ampal subleases 4,960 rentable square feet of office space leased by
Hapoalim at 1177 Avenue of the Americas, New York City under a sublease which
expires on August 30, 2009. The base rent which commenced in September 1994, is
$169,000, subject to escalation. In 1998, Ampal's total payments to Hapoalim in
connection with this lease totalled $170,000.

     The Company leases office space in various locations in Israel to Hapoalim
and its subsidiaries, pursuant to leases which will generally expire in the
years between 2000 and 2003, in exchange for total rental payments in 1998 of
approximately $2,870,000. Generally, the annual payments are based upon 10% of
the value of the property linked to the Israeli CPI.

     At the request of, and pursuant to the terms of an employment agreement
with, Ampal, Mr. Lefkowitz has been counsel to Hapoalim and has rendered legal
services to its United States branches since August 1990. Mr. Lefkowitz resigned
from the Company in September 1998. In 1998, Hapoalim reimbursed Ampal $73,000
for the services of Mr. Lefkowitz under the arrangement.



                                      74

<PAGE>   76


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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


                                                                         Page
                                                                      Reference*
                                                                      ----------
  (1) Financial Statements and Supplementary Data

      Ampal-American Israel Corporation and Subsidiaries

          Report of Independent Public Accountants........................  35
          Consolidated Statements of Income for the years ended December 
             31, 1998, 1997 and 1996......................................  36
          Consolidated Balance Sheets as at December 31, 1998 and 1997....  37
          Consolidated Statements of Cash Flows for the years ended 
             December 31, 1998, 1997 and 1996.............................  39
          Consolidated Statements of Changes in Shareholders' Equity 
             for the years ended December 31, 1998, 1997 and 1996.........  41
          Consolidated Statements of Comprehensive Income for the years 
             ended December 31, 1998, 1997 and 1996.......................  42
          Notes to Consolidated Financial Statements......................  44

  Supplementary Data:

          Selected quarterly financial data for the years ended
             December 31, 1998 and 1997...................................  61

  (2) Financial Statement Schedules

               Schedules which have been omitted are not applicable or the
               required information is shown in the financial statements or
               notes thereto.

     (i)  Schedule of Representative Rates of Exchange between the U.S. dollar
          and New Israeli Shekel for three years ended December 31, 1998


     (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..........................  81
          Consolidated Balance Sheets as at December 31, 1998 and 1997....  83
          Consolidated Statements of Income for the years ended 
             December 31, 1998, 1997 and 1996.............................  85
          Consolidated Statements of Shareholders' Equity for the 
             years ended December 31, 1998, 1997 and 1996.................  86
          Consolidated Statements of Cash Flows for the years ended
             December 31, 1998, 1997 and 1996.............................  87
          Notes to Consolidated Financial Statements......................  91
         
    (iii) Reports of Other Certified Public Accountants filed pursuant to Rule
          2-05 of Regulation S-X:

          AM-HAL Ltd...................................................... 132
          Ampal Engineering (1994) Ltd.................................... 133
          Ampal Enterprises Ltd........................................... 135
          Ampal Financial Services Ltd.................................... 136
          Ampal Holdings (1991) Ltd....................................... 137


                                      75

<PAGE>   77

          Ampal Industries (Israel) Ltd................................... 139
          Ampal (Israel) Ltd.............................................. 140
          Ampal Properties Ltd............................................ 142
          Bay Heart Ltd. ................................................. 144
          Carmel Container Systems Ltd. .................................. 147
          Country Club Kfar Saba Limited.................................. 148
          Coral World International Limited............................... 150
          Epsilon Investment House Ltd.................................... 152
          Hod Hasharon Sport Center (1992) Limited Partnership............ 153
          Mivnat Holdings Ltd............................................. 155
          Moriah Hotels Ltd. ............................................. 156
          Nir Ltd......................................................... 157
          Ophir Holdings Ltd. ............................................ 159
          Orlite Industries (1959) Ltd.................................... 161
          Ortek Ltd. ..................................................... 162
          Paradise Industries Ltd. (U.S. Dollars)......................... 163
          Red Sea Marineland Holding (1973) Ltd........................... 164
          Red Sea Underwater Observatory Ltd.............................. 165
          Renaissance Investment Co. Ltd.................................. 166
          Shmey-Bar Real Estate 1993 Ltd.................................. 167
          Shmey-Bar (T.H.) 1993 Ltd....................................... 169
          Teledata Communications Ltd..................................... 171
          Trinet Investment in High-Tech Ltd.............................. 172
          Trinet Venture Capital Ltd. .................................... 174
          U.D.S. Ultimate Distribution Systems Ltd........................ 176

(3) List of Exhibits

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
               June 9, 1998. (Filed as Exhibit 3 to Form 10-Q, for the
               quarter ended September 30, 1998 and incorporated herein by
               reference. File No. 0-538).

                                      76

<PAGE>   78

Exhibit 4 - Instruments defining the rights of security holders, including
            indentures

          4a.  Form of Indenture dated as of November 1, 1984. (Filed as Exhibit
               4a to Registration Statement No. 2-88582 and incorporated herein
               by reference).

          4b.  Form of Indenture dated as of May 1, 1986. (Filed as Exhibit 4a
               to Pre-Effective Amendment No. 1 to Registration Statement No.
               33-5578 and incorporated herein by reference).

Exhibit 10 - Material contracts

          10a. Employment contract of Lawrence Lefkowitz, dated July 26, 1993.
               (Filed as Exhibit 10.2 to Pre-Effective Amendment No. 1 to
               Registration Statement No. 33-51023 and incorporated herein by
               reference).

          10b. Legal Services Agreement, dated as of August 1, 1990, between
               Bank Hapoalim B.M. and Ampal-American Israel Corporation. (Filed
               as Exhibit 10i to Form 10-K for fiscal year ended December 31,
               1990 and incorporated herein by reference. File No. 0-538).

          10c. Agreement dated February 7, 1992 among Inertia-Energies Future
               Technologies Ltd., Yehuda (Yul (i)e) Offer, Offer Brothers
               (Management) Ltd., Offer Shipping Ltd., Offer Ship Holdings Ltd.,
               L.I.N. (Holdings) Ltd., I.I.Z. European Enterprise B.V., AmnV,
               Amnion Leon, Ampal Industries Inc. and Yeshayahu Landau
               (Translation). (Filed as Exhibit 10.1 to Pre-Effective Amendment
               No. 1 to Registration Statement No. 33-51023 and incorporated
               herein by reference).

          10d. Ampal-American Israel Corporation's 1993 Stock Option Plan.
               (Filed as Exhibit 10.3 to Pre-Effective Amendment No. 1 to
               Registration Statement No. 33-51023 and incorporated herein by
               reference).

          10e. Amendment, dated as of March 23, 1994, to Ampal-American Israel
               Corporation's 1993 Stock Option Plan. (Filed as Exhibit 10h to
               Form 10-K for the fiscal year ended December 31, 1993 and
               incorporated herein by reference. File No. 0-538).

          10f. 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).

          10g. Committed Line of Credit Agreement, dated as of June 5, 1992, and
               amendments, dated October 31, 1992 and October 31, 1993. (Filed
               as Exhibit 10.5 to Pre-Effective Amendment No. 1 to Registration
               Statement No. 33-51023 and incorporated herein by reference).

          10h. Agreement, dated January 18, 1994, between Ampal Industries, Inc.
               and Inerta-Energies and Future Technologies Ltd. (Translation).
               (Filed as Exhibit 10.6 to Pre-Effective Amendment No. 1 to
               Registration Statement No. 33-51023 and incorporated herein by
               reference).

          10i. Agreement, dated March 30, 1994, between Investment Company of
               Bank Hapoalim 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).

          10j. Share Purchase Contract, dated October 11, 1996, between Ampal
               Industries, Inc. and Agrifarm International Ltd. (Translation).
               (Filed as Exhibit 10 to Form 10-Q for the quarter ended September
               30, 1996 and incorporated herein by reference. File No. 2-5061).



                                      77

<PAGE>   79

          10k. Exchange Agreement, dated as of December 11, 1996, between
               Ampal-American Israel Corporation and Bank Hapoalim B.M. (Filed
               as Exhibit 2 to Amendment No. 34 of Schedule 13D filed by Bank
               Hapoalim B.M. on December 20, 1996 and incorporated herein by
               reference).

          10l. Declaration Establishing a Plan for Condominium Ownership of
               Premises 800 Second Avenue, New York, New York, dated December
               12, 1996. (Filed as Exhibit A to Exhibit 10m to From 10-K for the
               fiscal year ended December 31, 1997 and incorporated herein by
               reference. File No. 0-538).

          10m. Employment Agreement, dated May 28, 1997, among Ampal-American
               Israel Corporation, Ampal (Israel) Ltd. and Yehoshua Gleitman.
               (Filed as Exhibit 10a. to Report on Form 10-Q, for the quarter
               ended June 30, 1997. File No. 0-538).

          10n. Stock Option and Stock Purchase Agreement dated as of March 27,
               1998, between Ampal-American Israel Corporation and Yehoshua
               Gleitman, as amended. (Filed as Exhibit 10p to Form 10-K for the
               fiscal year ended December 31, 1997 and incorporated herein by
               reference. File No. 0-538)

          10o. Amendment No. 1, dated June 4, 1997, to that certain Legal
               Services Agreement between Bank Hapoalim B.M. and Ampal-American
               Israel Corporation. (Filed as Exhibit 10c. to Form 10-Q, for the
               quarter ended June 30, 1997. File No. 0-538).

          10p. Agreement dated September 9, 1997, between Ampal Industries
               (Israel) Limited and Raz Steinmetz. (Filed as Exhibit 10 to
               Report on Form 10-Q for the quarter ended September 30, 1997.
               File No. 0-538).

          10q. Agreement, dated as of March 1, 1997, among Emmes Asset
               Management Corp., Ampal-American Israel Corporation and Ampal
               Realty Corporation. (Filed as Exhibit 10s to Form 10-K for the
               fiscal year year ended December 31, 1997 and incorporated herein
               by reference. File No. 0-538).

          10r. 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).

          10s. 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).

          10t. Amendment No. 1, dated June 16, 1998, to a letter agreement, 
               dated September 9, 1997, between Ampal Industries (Israel)
               Limited and Raz Steinmetz. (Filed as Exhibit 10.3 to Report on
               Form 10-Q, for the quarter ended June 30, 1998. File No. 0-538).


Exhibit 11 - Computation of Earnings Per Share..................................

Exhibit 12 - Statement re Computation of Ratios.................................

Exhibit 21 - Subsidiaries of the Registrant.....................................

Exhibit 23 - Consents of Auditors:

        AM-HAL Ltd..............................................................
        Ampal-American Israel Corporation.......................................
        Ampal-American Israel Corporation.......................................
        Ampal Engineering (1994) Ltd............................................
        Ampal Enterprises Ltd...................................................
        Ampal Financial Services Ltd............................................
        Ampal Holding (1991) Ltd................................................
        Ampal Industries (Israel) Ltd...........................................
        Ampal (Israel) Ltd......................................................
        Ampal Properties Ltd....................................................
        Bay Heart, Ltd..........................................................
        Carmel Container Systems Ltd............................................
        Coral World International Ltd...........................................
        Coral World International Ltd...........................................
        Country Club Kfar Saba Limited..........................................
        Epsilon Investment House Ltd............................................
        Granite Hacarmel Investments Limited....................................
        Hod Hasharon Sport Center (1992) Ltd. Partnership.......................
        Mivnat Holdings Ltd.....................................................
        Moriah Hotels Ltd.......................................................
        Nir Ltd.................................................................
        Ophir Holdings Ltd......................................................
        Orlite Industries (1959) Ltd............................................
        Ortek Ltd...............................................................
        Paradise Industries Ltd.................................................
        Red Sea Marineland Holding (1973) Ltd...................................
        Red Sea Underwater Observatory Ltd......................................
        Renaissance Investment Co. Ltd..........................................

                                      78


<PAGE>   80

        Shmey-Bar Real Estate 1993 Ltd..........................................
        Shmey-Bar (T.H.) 1993 Ltd...............................................
        Teledata Communications Ltd.............................................
        Trinet Investment in High-Tech Ltd......................................
        Trinet Venture Capital Ltd..............................................
        U.D.S. Ultimate Distribution Systems Ltd................................

Exhibit 24 - Powers of Attorney.................................................

     (b) No reports on Form 8-K were filed during the last quarter of 1998. A
Current Report on Form 8-K was filed by the Registrant on February 5, 1998,
which described an Item 2 event, the acquisition from Motorola Communications
Israel Ltd. of the assets of its shared networks operations.




                                      79

<PAGE>   81


                        REPRESENTATIVE RATES OF EXCHANGE
               BETWEEN THE U.S. DOLLAR AND THE NEW ISRAELI SHEKEL
                   FOR THE THREE YEARS ENDED DECEMBER 31, 1998

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

<TABLE>
<CAPTION>
                                        1998             1997             1996
                                      --------         --------         --------
<S>                                      <C>              <C>              <C>  
March 31 ....................            3.597            3.361            3.111
June 30 .....................            3.667            3.587            3.203
September 30 ................            3.845            3.497            3.220
December 31 .................            4.160            3.536            3.251
</TABLE>


                                      80

<PAGE>   82


[KPMG LOGO]


       SOMEKH CHAIKIN

       Mail address              Office address         Telephone 872 4 857 8998
       PO Box 240                7 Ergar Street         Fax 972 4 857 9857
       Tirat HaCarmel 28101      Tirat HaCarmel 39032
       Israel                    Israel


Tirat HaCarmel, March 23, 1999



INDEPENDENT AUDITORS' REPORT


To the Board of Directors and 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, 1998
and 1997, and the related consolidated statements of income, shareholders' 
equity and cash flows for each of the three years in the period ended December 
31, 1998. These 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 financial statements based on our audits.

We did not audit the financial statements of Vulcan Batteries Ltd., a
consolidated subsidiary, whose assets constitute 3.4% and 3.6% of the total
consolidated assets as of December 31, 1998 and 1997 respectively, and whose
revenues constitute 3.3%, 3% and 3% of the total consolidated revenues for the
years ended December 31, 1998, 1997 and 1996, respectively. Those statements
were audited by other auditors whose report thereon was furnished to us. Our
opinion expressed herein, insofar as it relates to the amounts included for such
subsidiary, is based solely on the report of the other auditors. Furthermore,
the data included in the financial statements relating to the net asset value of
the Company's investments in affiliates and to its equity in their operating
results is based on the financial statements of such affiliates, some of which
were audited by other auditors.

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

The above mentioned financial statements were prepared on the basis of the 
historical cost convention. In historical 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.




[KPMG ADDRESS LOGO]


                                       81
<PAGE>   83


In our opinion, based on our audit and the reports 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles. Furthermore, these statements have, in our opinion, been
prepared in accordance with the Securities Regulation (Preparation of Annual
Financial Statements) 1993.

Consolidated financial statements, stated in U.S. dollars are included in Note 
29 to the financial statements.

Without qualifying our opinion, we would like to bring attention to Note 26 to 
the financial statements regarding proposals to shorten agreements made by a 
consolidated company with filling station operators and owners; and other 
proposals regarding the fuel market. At this time, it is not possible to 
estimate the effect of the above on the fuel market in general and on the 
Company in particular.




SOMELEH CHAIKIN
Certified Public Accountants (Israel)


                                       82
<PAGE>   84

              GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
                                           
                           CONSOLIDATED BALANCE SHEETS

                     Adjusted to the Index of December 1998
                     --------------------------------------

                                                 
<TABLE>
<CAPTION>
                                               N 
                                               0              December 31, 
                                               t              ------------
                                               e          1998             1997
                                                          ----             ----
                                                       Adjusted NIS. (thousands)
                                                       ------------------------
<S>                                           <C>    <C>              <C>       
Current assets 
  Cash and cash equivalents                              9,760            8,533
  Marketable securities                        4         8,731            4,730
  Trade receivables                            5       620,466          530,575
  Accounts receivable                          5       170,599           90,278*
  Inventories                                  6       199,117          292,301
                                                     ---------        ---------
                                                     1,008,673          926,417
                                                     ---------        ---------

Investments, long-term 
 loans and debit balances 
  
  Affiliated companies and others              7       155,640          163,204
  Long-term loans                              8        80,518           82,609
                                                     =========        =========
                                                       236,158          245,813
                                                     =========        =========

Fixed assets                                   9
  Cost                                               1,576,380        1,495,612
  Less: Accumulated depreciation                       870,344          800,447
                                                     ---------        ---------
                                                       706,036          695,165
                                                     =========        =========

Intangible assets and 
  deferred charges, net                       10        54,054           54,195
                                                     ---------        ---------

                                                     2,004,921        1,921,590
                                                     =========        =========
</TABLE>

*  Reclassified 

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


                                     83
<PAGE>   85

              GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                     Adjusted to the Index of December 1998
                     --------------------------------------
<TABLE>
<CAPTION>
                                                 
                                                             December 31,
                                               N     ---------------------------
                                               0          1998             1997
                                               t     ---------       -----------
                                               e      Adjusted NIS. (thousands)
                                              ---    ---------------------------
<S>                                         <C>      <C>              <C>
Current liabilities                   
 Credits from banks and others                 11    1,064,293          488,876 
 Current portion of                   
  convertible debentures                       14       14,224           44,858
 Trade payables                                12       74,669           56,679*
 Accounts payable                              13      145,074           98,227
                                                     ---------        --------- 
                                                     1,298,260          688,640
                                                     ---------        --------- 
                                      
Long-term liabilities                 
 Long-term loans                               14        3,964           97,428
 Debentures convertible into          
  shares of the Company                        14       42,673          169,789
 Customers' deposits                           15       63,252           67,314
 Liabilities for employee rights      
  upon retirement, net                         16       14,163           11,843
 Capital notes issued by              
  a consolidated company                                   215              234
                                                     ---------        --------- 
                                                       124,267          346,608
                                                     ---------        --------- 
Minority  interest                                      13,408           11,763
                                                     ---------        --------- 
Collaterals, commitments and          
 contingent  liabilities                    25,26 
                                      
Shareholders' equity                                   568,986         874,579 
                                                     ---------        --------- 
                                                     2,004,921        1,921,590 
                                                     =========        =========
</TABLE>

* Reclassified 

Prof. I. Borovich - Chairman of the Board

A. Zilberberg - Director

M. Erez - Managing Director

Date: March 23, 1999

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


                                       84
<PAGE>   86

              GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
                                           
                        CONSOLIDATED STATEMENTS OF INCOME

                     Adjusted to the Index of December 1998
                     --------------------------------------
<TABLE>
<CAPTION>
                                        
                                                  Year ended December 31,
                                      N   -------------------------------------
                                      o        1998          1997          1996
                                      t   ---------     ---------     ---------
                                      e          Adjusted NIS. (thousands)
                                     ---  -------------------------------------
<S>                                  <C>  <C>           <C>           <C>       
Sales                                     3,159,039     3,356,048     3,378,196 
Less: Government imposts                  1,348,494     1,357,675     1,309,958 
                                          ---------     ---------     ---------
Net sales                                 1,810,545     1,998,373     2,068,238 
Cost of sales                         19  1,309,847     1,552,980     1,621,118 
                                          ---------     ---------     ---------
Gross profit                                500,698       445,393       447,120 
                                          ---------     ---------     ---------
Selling and marketing expenses        20    313,093       281,886       276,960 
General and administrative expenses   21     68,716        61,493        56,068 
                                          ---------     ---------     ---------
                                            381,809       343,379       333,028 
                                          ---------     ---------     ---------
Income from operations                      118,889       102,014       114,092 
                                          ---------     ---------     ---------
Financing expenses, net               22    (22,041)      (25,955)      (21,487)
Other income, net                     23     19,062        14,680         8,617 
                                          ---------     ---------     ---------
                                             (2,979)      (11,275)      (12,870)
                                          ---------     ---------     ---------
Income before taxes on income               115,910        90,739       101,222 
Taxes on income                       24     46,772        35,204        41,454 
                                          ---------     ---------     ---------
Income after taxes on income                 69,138        55,535        59,768 
Company's share in income (loss) 
 of affiliates, net                          (9,361)         (136)          773 
Minority interest in   
 consolidated subsidiaries                   (1,052)           95        (1,709)
                                          ---------     ---------     ---------
Net income for the year                      58,725        55,494        58,832 
                                          =========     =========     ========= 

Earnings per ordinary share
 (in adjusted NIS.):                  18 

 Primary                                       0.49          0.45          0.48 
                                               ====          ====          ==== 
 Fully diluted                                 0.49          0.42          0.32 
                                               ====          ====          ==== 
</TABLE>

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


                                       85
<PAGE>   87

              GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
                                           
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                     Adjusted to the Index of December 1998
                     --------------------------------------
<TABLE>
<CAPTION>                                                    
                                                                  Retained                  
                                        Capital      Premium      Earnings        Total
                                        -------      -------      --------       -------
                                                    Adjusted NIS. (thousands)
                                        ------------------------------------------------
<S>                                     <C>          <C>           <C>           <C>    
Balance as at January 1, 1996           234,119      133,054       458,231       825,404

Changes in 1996:

Net income for the year                      --           --        58,832        58,832

Dividend paid                                --           --       (32,505)      (32,505)
                                                                  --------       -------
Balance as at December 31, 1996         234,119      133,054       484,558       851,731

Changes in 1997:

Net income for the year                      --           --        55,494        55,494

Dividend paid                                --           --       (32,646)      (32,646)
                                        -------      -------      --------       -------
Balance as at December 31, 1997         234,119      133,054       507,406       874,579

Changes in 1998:

Conversion of debentures to shares       16,277      119,314*           --       135,591

Net income for the year                      --           --        58,725        58,725

Dividend paid                                --           --      (500,000)     (500,000)

Proceeds from the sale of
 the Company's shares by a
 consolidated company, net                   --           91            --            91

Balance as at December 31, 1998         250,396      252,459        66,131       568,986
                                        =======      =======       =======       =======
</TABLE>

*  Net of issuance expenses in the amount of NIS. 1,952 thousand. 

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


                                       86
<PAGE>   88

              GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                     Adjusted to the Index of December 1998
                     --------------------------------------
<TABLE>
<CAPTION>
                                                              Year ended December 31,
                                                        1998          1997          1996
                                                      --------      --------      --------
                                                             Adjusted NIS. (thousands)
                                                      ------------------------------------
<S>                                                   <C>           <C>           <C>      
Cash flows from operating activities

Net income                                              58,725        55,494        58,832
Adjustments to reconcile net income
 to operating cash flows (A):                          113,029       (80,776)       15,187
                                                      --------      --------      --------
Net cash provided by (used for)
 operating activities                                  171,754       (25,282)       74,019
                                                      --------      --------      --------
Cash flows from investing activities

Acquisition of fixed assets                           (106,048)     (105,420)     (102,597)
Proceeds from sale of fixed assets (5)                  18,772        34,195         3,956
Dividend received from affiliates                           --            --         1,694
Long-term loans granted (1)                            (19,787)      (23,845)      (15,877)
Collection of long-term loans                           12,255        15,345        11,819
Investment in intangible and deferred charges          (11,293)      (21,156)      (16,706)
Investment in affiliated companies                      (1,720)      (17,643)      (79,572)
Proceeds from redemption of compulsory
 government loan                                            --           174           848
Proceeds from (investments in)
 marketable securities, net                             (6,551)        2,562        (4,454)
Investment in companies carried on the cost basis       (1,520)       (3,905)           -- 
Acquisition of shares in a subsidiary company               --            --        (1,884)
Repayment of capital notes of interested parties            --            --        12,870
Acquisition of initially
 consolidated companies (B), (3)                            --            --           (42)
                                                      --------      --------      --------
Net cash used for investing activities                (115,892)     (119,693)     (189,945)
                                                      --------      --------      --------
                              C/F                       55,862      (144,975)     (115,926) 
                                                      --------      --------      --------
</TABLE>


                                       87
<PAGE>   89

              GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
                                           
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                     Adjusted to the Index of December 1998
                     --------------------------------------
<TABLE>
<CAPTION>
                                                            Year ended December 31,
                                                    ------------------------------------
                                                        1998          1997          1996
                                                    --------      --------      --------
                                                           Adjusted NIS. (thousands)
                                                    ------------------------------------
<S>                                                 <C>           <C>           <C>      
                              B/F                     55,862      (144,975)     (115,926)
                                                    --------      --------      --------
Cash flows from financing activities:

Dividend paid                                       (500,000)      (32,646)      (32,505)
Dividend paid to minority shareholders
 in a consolidated subsidiary                           (283)         (527)         (354)
Short-term  credit from banks, net                   553,539       124,340       110,448
Long-term loans received                                 807        94,416        69,986
Long-term loans repaid (2)                           (70,821)       (1,312)       (1,100)
Redemption of capital notes issued
 by a consolidated company                                --            --           (89)
Customers' deposits received                           2,300         2,753         2,417
Customers' deposits repaid                              (890)         (608)         (729)
Redemption of debentures (4)                         (39,378)      (44,710)      (44,128)
Proceeds from sale of shares of a
 Company held by a consolidated company, net              91            --            -- 
                                                    --------      --------      --------
Net cash provided by (used for)
 financing activities                                (54,635)      141,706       103,946
                                                    --------      --------      --------
Increase (Decrease)  in cash and
 cash equivalents                                      1,227        (3,269)      (11,980)
Cash and cash equivalents  at beginning of year        8,533        11,802        23,782
                                                    --------      --------      --------
Cash and cash equivalents at end of year               9,760         8,533        11,802
                                                    ========      ========      ========
</TABLE>

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


                                       88
<PAGE>   90

              GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                            
                     Adjusted to the Index of December 1998
                     --------------------------------------  
                     
<TABLE>
<CAPTION>
                                                          Year ended December 31,       
                                                          ------------------------
                                                      1998          1997          1996
                                                       ----          ----          ----  
                                                          Adjusted NIS. (thousands)
                                                       --------------------------------      
<S>                                                 <C>           <C>           <C>   
(A)
Adjustments to reconcile net
 income to operating cash flows:

Income and expenses not requiring cash flows:
Depreciation and amortization                       86,936        83,499        80,038
Deferred taxes, net                                    316        (8,194)       (3,226)
Increase in liabilities for
 employee rights upon retirement, net                2,492         1,600         1,061
Minority interest in (loss) income of
 consolidated subsidiaries                           1,052           (95)        1,709
Company's share in loss (less undistributed
 income) of affiliates, net                         16,104         3,272         1,023
Capital gains                                       (9,959)       (6,980)         (361)
Erosion of investments in capital notes, net          (235)         (418)         (200)
Erosion of long-term loans,
 debentures and capital notes issued                18,210         5,431       (18,704)
Erosion of loans granted                             3,359           352         1,409
Decrease (Increase) in value of compulsory
 Government loan and securities, net                 2,481        (1,633)       (1,111)
Erosion of customers' deposits                      (5,472)       (4,824)       (4,395)
(Increase) Decrease of investment                   (1,152)        3,738            -- 
Write-off of loan to an affiliated company           1,381)        5,373            -- 
Profit on change in percent ownership
 of an affiliated company                              (49)           --            -- 

Changes in assets and liabilities:
Decrease (Increase) in trade and
 accounts receivable (1)(2)                       (154,843)       (3,324)     (156,458)
Decrease in inventories                             92,632        55,586        20,263
Increase (Decrease) in trade
 and accounts payable                               59,776      (214,159)       94,139

                                                  --------      --------      --------
                                                   113,029       (80,776)       15,187
                                                  ========      ========      ========
</TABLE>

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


                                       89
<PAGE>   91

              GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                            
                     Adjusted to the Index of December 1998
                     --------------------------------------

<TABLE>
<CAPTION>
                                                    Year ended December 31,
                                                    -----------------------                                                    
                                                  1998        1997        1996  
                                                  ----        ----        ---- 
                                                    Adjusted NIS. (thousands)
                                                  ----------------------------
<S>                                            <C>            <C>          <C>
(B)
Acquisition of initially
 consolidated companies

Assets and liabilities of the consolidated
 companies as at the acquisition date:

Working capital (not including
 cash and cash equivalents)                    (1,733)        729          30
Fixed assets, net                               2,482        (214)         (6)
Long-term debt, net                              (731)       (439)         -- 
Investment in an affiliated company                67          --          -- 
Goodwill created at acquisition                   685        (117)     (1,195)
Minority interest as of the
 aquisition date                                 (770)         41       1,129
                                                ------      ------      ------     
                                                   --          --         (42)
                                                ======      ======      ======
</TABLE>

Activities not requiring cash flow:

(1)   In 1998, current receivables from customers were converted into long-term
      loans in the amount of NIS.10,592 thousand (1997 - NIS.16,789 thousand).

(2)   In 1996, the redemption of a loan received from an affiliated company in
      the amount of NIS.5,230 thousand was offset against a receivable from the
      affiliated company.

(3)   In 1998, acquisition of a company initially consolidated in consideration
      of its debt in the amount of NIS. 1,481 thousand.

(4)   In 1998, NIS. 135,591 thousand of debentures were converted to shares, and
      in a consolidated company NIS. 151 thousand of debentures were
      converted to shares.

(5)   On December 31, 1998 an amount of NIS. 14,023 thousand was included in
      accounts receivable, representing the amount not yet received on account
      of the sale of fixed assets in 1998. (1997 - NIS. 14,621 thousand on
      accounts of the sale of fixed assets in 1997)

(6)   On December 31, 1998 an amount of NIS. 5,644 thousand was reflected in
      accounts payable, representing the balance due to a city relating to 50%
      of the plot of land sold to Rubinstein (see note 25.C.2.c).

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


                                       90

<PAGE>   92

              GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS IN ADJUSTED VALUES

      A.    General

            1.    Granite Hacarmel Investments Ltd. (hereafter "the
                  Company")(P.C. 520037177) and the other companies of the group
                  have prepared their financial statements on the basis of
                  historical cost which was adjusted to the changes in the
                  general purchasing power of the shekel.

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

            3.    The term "cost" used in the adjusted statements means cost in
                  adjusted shekels unless otherwise stated.

            4.    The comparative figures (including the monetary items) are
                  stated in shekels adjusted to the index of December 1998.

      B.    Basis of Adjustment - Consumer Price Index

            The adjusted amounts are expressed in New Israel Shekels, the
            purchasing power of which reflects the average price level of the
            month of December 1998, based on the Consumer Price Index published
            by the Central Bureau of Statistics ("Index"), on January 15, 1999
            (see Note 2.G.1.)

      C.    Principles of Adjustment

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

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

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

                  d.    Monetary items are stated in the adjusted statements at
                        their nominal values.


                                       91

<PAGE>   93

NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS IN ADJUSTED VALUES (CONTINUED)

            2.    Statement of Income
                  -------------------
                  The items of the statement of income were adjusted in
                  accordance with the changes in the consumer price index as
                  follows:

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

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

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

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

                  e.    Current taxes are composed of payments on account during
                        the year in addition to amounts payable as of the
                        balance sheet date (or net of refunds claimed as of the
                        balance sheet date). The payments on account were
                        adjusted based on the prevailing index on the date of
                        each payment, while the amounts payable (or claimed as
                        refund) are included without adjustment. Accordingly,
                        the current taxes include the expenses arising from the
                        erosion of the payments on account of taxes from the
                        date of payments to the balance sheet date.

                        Deferred taxes - see Note 2.J.

NOTE 2 - SIGNIFICANT REPORTING AND ACCOUNTING POLICIES

      A.    Principles of consolidation

            1.    The consolidated financial statements of the Company include
                  the consolidated financial statements of the Company and its
                  subsidiaries. The list of subsidiaries which are included in
                  the consolidated financial statements and the percent of
                  ownership and control therein are included in a separate
                  schedule to the financial statements.

            2.    Intercompany balances and transactions of consolidated
                  companies have been eliminated.


                                       92

<PAGE>   94

NOTE 2 - SIGNIFICANT REPORTING AND ACCOUNTING POLICIES (CONTINUED)

      B.    Investments in subsidiary and affiliated companies

            1     The investments in subsidiaries and affiliated companies are
                  reflected in the financial statements in accordance with their
                  adjusted equity at the balance sheet date, together with the
                  balance of the excess cost or net of the balance of deferred
                  credits. Other investments are stated at cost or under which
                  does not exceed equity as of the balance sheet date.
                  Subsidiary companies own several other inactive and/or
                  insignificant subsidiaries and therefore are not consolidated
                  and are carried at cost, which does not exceed their equity as
                  at the balance sheet date.

            2.    The excess of cost of investments in consolidated
                  subsidiaries, which is not related to specific assets, over
                  the value of net assets acquired ("Goodwill"), is included in
                  "Intangible assets and deferred charges, net" and is amortized
                  on the straight-line method over a period of ten years.

                  The excess value of net assets acquired over cost of
                  investments in affiliated companies, which is not related to
                  specific assets, is offset against the excess of cost included
                  in "Intangible assets and deferred charges, net" and is
                  amortized on the straight line method over a period of ten
                  years.

            3.    The investments of the Company in capital notes of affiliated
                  companies are presented in the financial statements of the
                  Company in accordance with the requirements of the Securities
                  Authority regarding transactions between the Company and its
                  interested parties.

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

      C.    Valuation of inventories

            1.    Inventory of crude oil and refined products
                  -------------------------------------------

                  The major part of the crude oil and refined product
                  inventories consists of Emergency Inventories. The Emergency
                  Inventories are valued based on current value, which does not
                  exceed market value in accordance with the lower of the
                  changes in the exchange rate determined by the Fuel Authority
                  ("Fuel Authority rate") or the dollar exchange rate. In all
                  instances, the recovery of the value of the Emergency
                  Inventories valued at the Fuel Authority rate are guaranteed
                  by the Government in accordance with the Commodities and
                  Services Control Order (Arrangements in the Oil Economy -
                  1988).

                  The commercial inventories (crude oil and refined products)
                  are stated at the lower of cost or market. The cost is
                  determined by the first-in, first-out method.


                                       93
<PAGE>   95

NOTE 2 - SIGNIFICANT REPORTING AND ACCOUNTING POLICIES (CONTINUED)

            2.    Other inventories
                  -----------------
                  The inventories of luboils, spare parts and others are stated
                  at the lower of cost or market.

                  The cost is determined by the first-in, first-out method
                  except for spare parts, which are valued by the moving average
                  method.

      D.    Fixed assets

            Fixed assets are carried at cost, net of investment grants, or at
            cost together with the addition of excess of cost over net asset
            value related to specific assets. Betterments and improvements are
            charged to assets while maintenance and repair expenses are charged
            as incurred to income.

      E.    Depreciation and Amortization

            Depreciation is computed on the straight line method at annual rates
            considered to be sufficient for depreciating the assets over their
            estimated useful lives.

            The annual rates of depreciation are as follows:                %
                                                                      --------
            Buildings (including temporary 
             and rental buildings)                                    2 - 6.5 
            Machinery and equipment                                    5 - 15  
            Vehicles                                                  15 - 20 
            Computers                                                 20 - 33 
            Furniture and office equipment (reflected 
             in machinery and equipment)                               6 - 10 
        
            The excess of cost over net asset value related to specific assets
            is depreciated over the remaining useful life as determined at the
            time the excess of cost was related to those assets.

            Leasehold rights are amortized over the term of the lease.

      F.    Debentures convertible into shares

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

            2.    Costs relating to the issuance of convertible debentures are
                  amortized over the period remaining until their maturity.


                                       94

<PAGE>   96

NOTE 2 - SIGNIFICANT REPORTING AND ACCOUNTING POLICIES (CONTINUED)

      G.    Foreign currency and linkage basis

            1.    Assets (other than securities) and liabilities in foreign
                  currencies or linked thereto are stated at the exchange rates
                  in effect for the balance sheet date.

                  Assets (other than securities) and liabilities linked to the
                  Index, are stated according to the linkage conditions applied
                  to each balance.

                  The Index, the exchange rates and the rate of changes therein
                  were as follows:

                                          December 31,          Changes in %  
                                      -------------------    ------------------
                                      1998    1997   1996    1998   1997   1996 
                                      ----    ----   ----    ----   ----   ----
                   
                   Index              166.3  153.1  143.1     8.6    7.0   10.6 
                   Exchange rate of 
                    the U.S. dollar   4.160  3.536  3.251    17.6    8.8    3.7 
               
            2.    Income and expenses in foreign currencies or linked thereto
                  are included in the appropriate items of the statements of
                  income based on the exchange rate in effect when such items
                  were recorded.

            3.    Exchange rate or linkage differences resulting from the
                  adjustment of assets and liabilities in foreign currency or of
                  assets and liabilities linked to the Index are included in the
                  statements of income in the appropriate items at the time
                  incurred.

      H.    Marketable Securities

            The marketable securities are carried at their market value on the
            date of the balance sheet. The changes in the value of the
            securities are reflected in the statements of income.

      I.    Provision for doubtful receivables

            The Company provides specifically for receivables the collection of
            which is doubtful according to management's opinion.

      J.    Deferred taxes

            Deferred taxes are computed for the purpose of the adjusted
            financial statements in respect of those components which create the
            difference between results measured in the adjusted financial
            statements and the results measured for income tax purposes. The
            deferred taxes are calculated according to the liability method at
            tax rates that will be in effect when the deferred taxes will be
            utilized, using tax rates that are known at the time of preparation
            of the financial statements (See note 24.b.).


                                       95
<PAGE>   97

NOTE 2 - SIGNIFICANT REPORTING AND ACCOUNTING POLICIES (CONTINUED)

            1.    The main factors in respect of which deferred taxes have been
                  included are as follows:

                  a.    Differences in depreciation and amortization for
                        accounting and tax purposes;

                  b.    Differences between the value of inventories for
                        accounting and tax purposes;

                  c.    Timing differences in recognition of income and expense
                        items for accounting and tax purposes (mainly linkage
                        differences on customers' deposits and provisions for
                        employee rights upon retirement).

            2.    The main factors in respect of which deferred taxes have not
                  been computed:

                  a.    Amount of the adjustment for the change in the
                        purchasing power of the New Israel Shekels relating to
                        buildings and private motor cars, in accordance with the
                        rules determined by the Institute of Certified Public
                        Accountants in Israel.

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

      K.    Recognition of income

            1.    Product sales - Income from the sale of products is recorded
                  upon dispatch to the customer.

            2.    Rental income - Rental income is recorded upon receipt of
                  payment, proportionately to the relevant period.

            3.    Construction project - Income from a construction project is
                  recorded in accordance with the Opinion No. 6 of the Institute
                  of Certified Public Accountants in Israel.

      L.    Provision for linkage increments on customers' deposits
 
            The wholly-owned subsidiary, Supergas Israel Gas Distribution
            Company Ltd. is obligated under a Government decree to pay customers
            terminating their gas purchasing agreement an amount equal to the
            latest approved deposit authorized by the Ministry of Trade and
            Industry, together with linkage increments from the date of the last
            approval to the date of payment. In periods subsequent to the last
            approval, Supergas provides for adjusting the amounts of the
            deposits on the basis of the expected next updating that it plans to
            request. Supergas provides for this liability on a discounted
            present value basis.



                                       96
<PAGE>   98

NOTE 2 - SIGNIFICANT REPORTING AND ACCOUNTING POLICIES (CONTINUED)

      M.    Earnings per share

            1.    Primary earnings
                  ----------------
                  The earnings per share are computed in accordance with Opinion
                  No. 55 of the Institute of Certified Public Accountants in
                  Israel, based on the weighted average of shares outstanding.

            2.    Fully diluted earnings
                  ----------------------
                  The fully diluted earnings per share are computed on the basis
                  of the computation of the primary earnings per share taking
                  into consideration theoretical conversion of the convertible
                  securities, subject to an anti dilutive test as stated in the
                  aforementioned Opinion.

      N.    Foreign currency futures transactions

            Sonol Israel Limited entered into a "free dollar transaction" with a
            bank by which Sonol acquired U.S. dollars bearing interest at
            variable rates, against an unlinked shekel loan, bearing interest at
            variable rates. The transaction may be closed at any time by netting
            the liability against the asset. The accumulated effect of the
            transaction is reflected in the statements of income.

      O.    Adjustment of computer systems to the year 2000

            Costs incurred for adjusting and updating the existing programs of
            the Company in order to distinguish between the years of the
            twentieth century and those of the twenty first century (adjustment
            to the year 2000) are charged as incurred to current expenses.
            Regarding the uncertainty arising from the above see also note 25.F.
            The costs of acquiring new programs which are compatible to the year
            2000 are capitalized as investments.

      P.    Use of estimates

            The preparation of financial statements in accordance with generally
            accepted accounting principles requires management to use estimates
            and valuations which influence 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.

      Q.    Presentation of transactions between the Company and a controlling
            party.

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




                                       97
<PAGE>   99

NOTE 3 - ACCOUNTING WITH THE FUEL AUTHORITY AND THE REFORM IN THE ENERGY SECTOR

      A.    Sonol Israel Ltd. ("Sonol")

            1.    Amounts due to or from the Fuel Authority, to the extent still
                  provisional, are included each year in the accounts according
                  to estimates prepared by Sonol based on past experience.
                  Differences which subsequently arise are reflected in the
                  results of the year in which such differences are determined.

            2.    All costs and expenses related to the holding of Emergency
                  Inventories are fully recoverable from the Government while
                  the holding of Commercial inventories is at the risk of the
                  oil marketing companies.

            3.    Government retail price controls have been lifted from all
                  fuel products marketed through public stations with the
                  exception of benzine 95 and 96 octane.

            4.    Pursuant to the recommendations of the committee previously
                  appointed by the Minister of Energy and Infrastructure, the
                  Minister of Energy and Infrastructure has announced his
                  intention to change the policy regarding the ownership of
                  Emergency Inventories of crude oil and refined products and to
                  separate them from the commercial inventories of the oil
                  companies. During the years 1996-1998 a partial transfer of
                  Emergency Inventories was carried out from the oil marketing
                  companies to other parties. Also, the Government intends to
                  separate the storage of refined products included in the
                  Emergency Inventories from the storage of refined products
                  used in current operations, and in the future, to issue
                  tenders to determine the party who will hold the Emergency
                  Inventories in warehouses specially designated by the
                  government. In the opinion of the Company, no negative effect
                  on the financial position and profitability of the subsidiary
                  company, Sonol, is expected as a result of the above changes.




                                       98
<PAGE>   100

NOTE 3 - ACCOUNTING WITH THE FUEL AUTHORITY AND THE REFORM FOR THE ENERGY SECTOR
         (CONTINUED) 

            5.    In accordance with a Government ordinance issued by the
                  Finance Minister and the Minister of Energy and Infrastructure
                  regarding the supplying of aviation kerosene (hereinafter
                  "ATK") to the airline companies at Ben-Gurion Airport, as of
                  September 1, 1996, Aviation Services Ltd. (an affiliated
                  company) (hereinafter "Aviation Services") ceased to be the
                  sole supplier of ATK. Sonol was one of the suppliers of ATK to
                  Aviation Services for many years. As a result of the
                  cancellation of the right of Aviation Services to supply ATK,
                  Sonol has, like other fuel companies, become a direct supplier
                  of ATK to the airline companies at Ben-Gurion airport. The
                  decree also determined the prices for refueling services and
                  for infrastructure services provided to the airline companies
                  at Ben-Gurion airport. In accordance with agreements signed
                  with the budget division of the Finance Ministry and with the
                  Airports Authority, Aviation Services will provide the
                  refueling services and its subsidiary (50% owned), Aviation
                  Properties Ltd., will provide the infrastructure services. The
                  agreements do not provide Aviation Services with exclusivity
                  in providing refueling services at Ben-Gurion airport, and
                  recently Airports Authority has announced its intention to
                  publish a tender for an additional provider of fueling
                  service.

                  At this time, it is too early to determine the effect of these
                  changes on the fuel market, in general, and on Sonol, in
                  particular.

      B.    Supergas

            Supergas lodged a claim in the District Court for a declarative
            judgement against the Ministry of Energy and Infrastructure, the
            Fuel Authority, regarding two matters relating to the period before
            the Gas Reform (commencing on August 1,1989). In its ruling, the
            Court accepted Supergas' claim on one matter and rejected the second
            claim. The Government and Supergas submitted an appeal to the
            Supreme Court and concurrently they negotiated to compromise the
            dispute. In December 1996, the parties reached a compromise
            agreement which received the status of a Supreme Court ruling and
            under whose terms the Government paid Supergas the amount of NIS.
            6.1 million, which was netted against "Government imposts" in
            statements of income for 1996.

NOTE 4 - MARKETABLE SECURITIES

          Consist of: 

<TABLE>
<CAPTION>
                                                                 December 31,
                                                               -----------------      
                                                               1998          1997 
                                                               ----          ---- 
                                                           Adjusted NIS. (thousands) 
                                                           ------------------------- 
<S>                                                           <C>           <C>  
            Shares                                            8,731         4,665
            Convertible debentures                               --            65
                                                           --------      --------
                                                              8,731         4,730
                                                           ========      ========
</TABLE>




                                      99
<PAGE>   101

NOTE 5 -  TRADE RECEIVABLES AND ACCOUNTS RECEIVABLE 

<TABLE>
<CAPTION>
                                                                 December 31,      
                                                               ------------------
                                                               1998          1997
                                                               ----          ---- 
                                                          Adjusted NIS. (thousands)
                                                          ------------------------- 
<S>                                                         <C>           <C>    
      A.    Trade receivables
            Consist of:
            Customers - open accounts                       500,992       427,486
            Checks and notes receivable                      41,396        48,072
            Credit card companies                            64,922        57,728
            Short-term loans and current portion
             of long-term loans granted                      26,108        10,595
            Less - provision for doubtful receivables(*)    (12,952)      (13,306)
                                                           --------      -------- 
                                                            620,466       530,575
                                                           ========      ========

      B.    Accounts receivable
            Consist of:
            Fuel Authority                                  104,476        11,922
            Government Institutions                              --           364
            Income receivable                                25,725        29,071
            Employees                                           677           896
            Prepaid expenses                                 10,019        11,031
            Income tax receivable                                --         9,540
            Future tax benefits, net(**)                      6,602         6,589
            Others                                           23,100        20,865*
                                                           --------      --------  
                                                            170,599        90,278
                                                           ========      ========
</TABLE>

            (*)  See note 2.I
            (**) See note 24. 

      C.    Regarding credit risks see note 25.E.

NOTE 6 - INVENTORIES

            Consist of: 

<TABLE>
<CAPTION>
                                                                  December 31,   
                                                               ------------------   
                                                               1998          1997
                                                               ----          ---- 
                                                           Adjusted NIS. (thousands)
                                                           ------------------------- 

<S>                                                         <C>           <C>   
            Crude oil and raw materials                      40,318        52,893
            Finished products                               148,143       229,346
            Materials and supplies                           10,656        10,062
                                                           --------      --------
                                                            199,117       292,301
                                                           ========      ========
</TABLE>

      *     See note 19.




                                      100
<PAGE>   102

NOTE 7 - SUBSIDIARIES, AFFILIATED COMPANIES AND OTHERS

<TABLE>
<CAPTION>
                                                                 December 31, 
                                                          ------------------------
                                                               1998          1997 
                                                               ----          ----
                                                          Adjusted NIS. (thousands) 
                                                          ------------------------
<S>                                                         <C>           <C>    
            Affiliated companies:
            Share at equity                                  26,000        33,107*
            Goodwill and excess cost attributed, net (4)     86,338        95,968
            Less: accumulated amortization                   (1,285)       (5,122)
                                                           --------      --------
            Book value (1)                                  111,053       123,953
            Long-term loans (3)                              12,663         9,676*
            Capital note and capital reserve, net
             of accumulated loss (2)                          7,670         8,059
                                                           --------      --------
                                                            131,386       141,688
            Others - cost less amortization (5)              24,254        21,516
                                                           --------      --------
                                                            155,640       163,204
                                                           ========      ========

<CAPTION>
                                                                 December 31,
                                                          ------------------------
   
                                                               1998          1997 
                                                               ----          ----
                                                          Adjusted NIS. (thousands) 
                                                          ------------------------
<S>                                                         <C>           <C>    
            (1)   Cost of shares including retained
                   earning as of December 31, 1991            7,346         7,346
                  Changes, beginning 1.1.92:
                  Cost of shares acquired                   129,076       127,354
                  Accumulated deficit (**)                  (25,369)      (11,144)*
                  Changes in capital reserves                    --           397
                                                           --------      --------
                  Book value (***)                          111,053       123,953
                                                           ========      ========

            *     Reclassified

            (**)  Dividend received
                   in the current year                        6,743         3,570
                                                           ========      ========
            (***) Including securities quoted
                   on the Tel-Aviv Exchange:
                  Book value                                 88,239        87,112
                                                           ========      ========
                  Market value                               49,576        42,353
                                                           ========      ========
</TABLE>

            (2)   Capital note is unsecured and non-negotiable, linked to the
                  Index, bears no interest and matures in the year 2001.

            (3)   The loans granted by a subsidiary to the affiliated company
                  Otzem Promotion and Investments (1991) Ltd. ("Otzem") are
                  index linked. The date of maturity is subject to the financial
                  capabilities of Otzem. The balance of the loan is NIS. 6,240
                  thousand (after a cumulative amount of NIS. 7,462 thousand).
                  The investment of the consolidated company in the shares of
                  Otzem has been written off. (See note 23(3)b.).




                                      101
<PAGE>   103

NOTE 7 - SUBSIDIARIES, AFFILIATED COMPANIES AND OTHERS (CONTINUED)

            (4)   Includes goodwill not yet amortized in the amount of NIS.
                  6,818 thousand (1997 - NIS. 7,580 thousand).

            (5)   See note 23.(3)a.

            (6)   See also Note 3.A.5.

            (7)   The book value of the investments (approximately 10%) in
                  Nitzba Holdings (1995) Ltd. (hereafter "Nitzba") is based on
                  the estimated financial results of Nitzba for the year 1998,
                  taking into consideration its results for the period of nine
                  months ended on September 30, 1998. In the opinion of the
                  Company's management, a possible deviation in the financial
                  results of Nitzba as they will be reported, would not
                  materially affect the Company.

            (8)   Changes in investments in affiliated companies and others.

<TABLE>
<CAPTION>
                                                       Adjusted NIS. (thousands) 

<S>                                                            <C>     
                  Balance as at January 1, 1998                163,204 
                  Changes during the year: 
                  Investments in shares                          3,310 
                  Long-term loans granted                        3,895 
                  Sales of investments                              - 
                  Equity loss, net                              (9,361) 
                  Dividend received                             (6,743) 
                  Other changes                                  1,335  
                  Balance as at December 31, 1998              155,640 
                                                               ======= 
</TABLE>

NOTE 8 - LONG-TERM LOANS

      a.    Consist of:

<TABLE>
<CAPTION>
                                                            December 31,
                                                        1998            1997 
                                                     Adjusted NIS. (thousands) 
         
<S>                                                  <C>              <C>     
            Loans to customers                       106,493          93,059  
            Loans to employees                           153             145 
                                                     106,646          93,204 
         
            Less: current portion                     26,128          10,595 
         
                                                      80,518          82,609 
                                                      ======          ====== 
            The years of maturity of the loans: 
         
            First year - current portion              26,128          10,595 
            Second year                               15,635          12,610 
            Third year                                 6,419          17,044 
            Fourth year                                7,209           5,473 
            Fith year                                 10,746           3,923 
            Sixth year and thereafter and 
             without maturity date                    40,509          43,559 
       
                                                     106,646          93,204  
                                                     =======          ====== 
</TABLE>




                                      102
<PAGE>   104

NOTE 8 - LONG-TERM LOANS (CONTINUED) 

      b.    Breakdown of loans by level of borrowers' balances:

<TABLE>
<CAPTION>
            Borrowers'           December 31, 1998           December 31, 1997 
            balances             Number of   Total           Number of   Total 
            (NIS. thousands)     loans  NIS.thousands        loans  NIS.thousands 
           
<S>                               <C>      <C>                <C>       <C>     
            Less than 100         108        4,416            131        6,503  
            100 - 500              29        8,155             25        8,068  
            500 - 1,000            14        8,661             11        8,258  
            Above 1,000            34       85,414             27       70,375  
           
                                  185      106,646            194       93,204 
                                  ===      =======            ===       ====== 
</TABLE>

      c.    Linkage terms and interest rates:

<TABLE>
<CAPTION>
                                              December 31, 1998                 
                               Unlinked         Linked to      Linked to      Total 
                                                  index         foreign 
                                                                currency      
            Interest rates:    0%    10-20%   0-4%     4-10%    0%    5-9%
                                            Adjusted NIS. (thousands)         
<S>                          <C>     <C>     <C>      <C>     <C>    <C>     <C>     
            Loans to: 
             Customers       4,980   8,085   44,176   38,720  5,716  4,816   106,493 
             Employees          --      --      153       --     --     --       153 
                             4,980   8,085   44,329   38,720  5,716  4,816   106,646 
                             =====   =====   ======   ======  =====  ===== 
            Less: current 
                   portion                                                    26,128 
                                                                              80,518 
                                                                             ======= 
          
<CAPTION>
                                             December 31, 1997                     
                               Unlinked        Linked to      Linked to       Total 
                                                 index        foreign 
                                                              currency              
            Interest rates:    0%    10-20%   0-4%     4-10%    0%    5-9%  
                                            Adjusted NIS. (thousands)              
<S>                          <C>     <C>     <C>      <C>     <C>    <C>     <C>     
            Loans to: 
             Customers         379   3,037   45,112   32,850  5,912  5,769    93,059 
             Employees           -      --      145       --     --     --       145 
                               379   3,037   45,257   32,850  5,912  5,769    93,204 
                              ====   =====   ======   ======  =====  =====           
            Less: current
                   portion                                                    10,595 
                                                                              82,609 
                                                                              ====== 
</TABLE>

      d.    Regarding credit risks see note 25.E.




                                      103
<PAGE>   105

NOTE 9 - FIXED ASSETS

      a.    Consist of:

<TABLE>
<CAPTION>
                                Land         Machinery                          
                                and          and                                
                                Buildings    Equipment   Vehicles    Others       Total 
                                                Adjusted NIS. (thousands)
<S>                              <C>          <C>         <C>        <C>        <C>     
      Cost                                                                      
      Balance at beginning                                                      
       of year                   560,281      806,814     52,117      76,400    1,495,612*
      Additions                   47,292       49,601      6,491       7,386      110,770 
      Disposals                  (15,006)      (8,787)    (6,207)         (2)     (30,002)
                                                                                
      Balance at end of year     592,567      847,628     52,401      83,784    1,576,380*
                                                                                
      Accumulated depreciation                                                  
      Balance at beginning                                                      
       of year                   169,766      551,273     32,908      46,500      800,447 
      Depreciation charged        15,665       52,839      6,201       5,564       80,269 
      Depreciation in                                                           
       respect of disposals           --       (5,698)    (4,674)         --      (10,372)
                                                                                
      Balance at end of year     185,431      598,414     34,435      52,064      870,344 
                                                                                
      Depreciated balance as                                                    
       of December 31, 1998      407,136      249,214     17,966      31,720      706,036 
                                 =======      =======     ======      ======      ======= 
      Depreciated balance as                                                    
       of December 31, 1997      390,515      255,541     19,209      29,900      695,165 
                                 =======      =======     ======      ======      ======= 
</TABLE>

      (*)   Net of investment grants in the amount of NIS. 16,052 thousand.

      b.    Land and buildings include buildings on lease-hold lands, the cost
            of which is NIS. 235,725 thousand, for various original periods of
            49 - 98 years, ending in the years 1999 - 2072. Land and buildings
            at a cost of NIS. 238,772 thousand have not yet been registered in
            the name of the Company or consolidated subsidiaries in the Land
            Registry Office. The main reason for the lack of registration is
            that the land settlement and sub-division process has not yet been
            completed.

      c.    Commitments and contingent liabilities - See note 25.

NOTE 10 - INTANGIBLE ASSETS AND DEFERRED CHARGES, NET

            Consist of:                                 
            
<TABLE>     
<CAPTION>   
                                                             Balance to be amortized
                                                                as of  December 31,
                                                                 1998          1997
                                                             Adjusted NIS. (thousands)
<S>                                                            <C>           <C>   
            Intangible assets:
            
            Deferred rent                                      29,577        28,499
            Goodwill in consolidated
             subsidiaries (1)                                   5,784         7,010
            Others                                             14,739        11,903
                                                               50,100        47,412
            Deferred charges:
</TABLE>




                                      104
<PAGE>   106

<TABLE>
<S>                                                            <C>           <C>   
            Expenses incurred in the issuance
             of debentures by the Company (2)                   1,045         4,323
            Expenses incurred in the issuance
             of debentures by a consolidated
             subsidiary (2)                                        --            79
                                                               51,145        51,814
            Less: Deferred credit in a
                  consolidated subsidiary (1)                     829         1,686
            
                                                               50,316        50,128
            Long-term future tax benefits (see note 24)         3,738         4,067
                                                               54,054        54,195
                                                             ========      ========
</TABLE>  

      (1)   For amortization see note 2.B.2
      (2)   For amortization see note 2.F.

NOTE 11 - CREDITS FROM BANKS AND OTHERS

            Linkage terms and interest rates:
            
<TABLE>     
<CAPTION>   
                                                         December 31, 1998
                                         Unlinked       linked       Linked to       Total
                                                           to         foreign
                                                         Index        currency
            Interest rates:              13.7-18.0%       2-6%        5.4-7.0%
                                                      Adjusted NIS. (thousands)
<S>                                        <C>            <C>          <C>         <C>  
            Overdrafts                       4,611            --            --         4,611
            Short-term loans               752,115            --       209,248       961,363
            Current portion of
             long-term loans                    24        92,686            36        92,746
            
            Total credits from banks       756,750        92,686       209,284     1,058,720
            Credits from others
             (related party)                    --         5,573            --         5,573
            
                                           756,750        98,259       209,284     1,064,293
                                         =========     =========     =========     =========
</TABLE>

<TABLE>
<CAPTION>
                                                     December 31, 1997
                                        Unlinked     linked      Linked to    Total
                                                       to        foreign
                                                      Index      currency
            Interest rates:            13.7-17.9%    2-4.75%     6.2-7.2%
                                                   Adjusted NIS. (thousands)
<S>                                      <C>          <C>         <C>        <C>    
            Overdrafts                     1,692          --          --       1,692
            Short-term loans             377,077          --      35,720     412,797
            Current portion of
             long-term loans                  22      70,937         630      71,589
           
            Total credits from banks     378,791      70,937      36,350     486,078
            Credit from others
            (related party)                   --       2,798          --       2,798
           
                                         378,791      73,735      36,350     488,876
                                         =======     =======     =======     =======
</TABLE> 

NOTE 12 - TRADE PAYABLES

            The liabilities represent open amounts and include NIS. 13,133
            thousand (1997 - NIS.2,585 thousand) balances of related and
            interested parties.




                                      105
<PAGE>   107

NOTE 13 - ACCOUNTS PAYABLE

<TABLE>
<CAPTION>
                                                           December 31,   December 31,
                                                                1998           1997
                                                            Adjusted NIS. (thousands)
<S>                                                          <C>             <C>   
            Liabilities to employees and
             other salary related liabilities                 30,186         24,641
            Institutions                                      58,227         39,357
            Accrued expenses                                  32,794         20,972
            Income tax payable                                 8,495             --
            Others                                            15,372         13,257
                                                             145,074         98,227
                                                             =======        =======
</TABLE>

NOTE 14 - LONG-TERM LIABILITIES

      A.    Long-term loans

<TABLE>
<CAPTION>
                                                  Rate of   December 31,     December 31,
                                                 interest        1998             1997
                                                     %       Adjusted NIS. (thousands)
<S>                                               <C>          <C>             <C>    
            U.S. Dollar loans from banks              7.0          39            1,818
            Index linked loans from banks         4.7-5.3      93,317          163,812
            Customers' deposit - linked                                      
             to the index                              --       3,027            2,985
            Customers' deposit - linked                                      
             to foreign currency                       --          18               66
            Unlinked loans from banks                16.8          46               73
            Other loans - linked to the Index          --         263              263
                                                               96,710          169,017
            Less: current portion                              92,746           71,589
                                                                             
                                                                3,964           97,428
                                                               ======           ======
</TABLE>

            Yearly installments:

<TABLE>
<CAPTION>
                                                           December 31,   December 31,
                                                                1998           1997
                                                            Adjusted NIS. (thousands)
<S>                                                           <C>            <C>   
            First year - current portion                      92,746         71,589
            Second year                                          188         92,936
            Third year                                           150            249
            Fourth year                                          158            224
            Fifth year                                           161            224
            No due date                                        3,307          3,795
                                                               3,964         97,428
                                                              96,710        169,017
                                                             =======        =======
</TABLE>

            Accrued interest is included in "Accounts payable" in Current
            liabilities.



                                      106
<PAGE>   108

NOTE 14 - LONG-TERM LIABILITIES (CONTINUED)

      B.    Debentures convertible into shares of the Company
  
<TABLE>
<CAPTION>
                                                           December 31,   December 31,
                                                                1998           1997
                                                            Adjusted NIS. (thousands)
<S>                                                           <C>           <C>   
            Debentures (Series 1)(*)                          45,734         57,466
            Debentures (series 2)(**)                         11,163        154,771
                                                              56,897        212,237
            Less - current portion                            14,224         42,448
                                                              42,673        169,789
                                                             =======        =======
</TABLE>

            Yearly installments:

<TABLE>
<CAPTION>
                                               December 31, 1998      December 31, 1997
                                              Series 1  Series 2     Series 1  Series 2
                                                        Adjusted NIS. (thousands)
<S>                                             <C>        <C>         <C>       <C>   
            First year - current portion        11,433     2,791       11,493    30,955
            Second year                         11,433     2,791       11,493    30,955
            Third year                          11,434     2,791       11,493    30,955
            Fourth year                         11,434     2,790       11,493    30,953
            Fith year                               -         -        11,494    30,953
                                                34,301     8,372       45,973   123,816
  
                                                45,734    11,163       57,466   154,771
                                                ======   =======       ======   =======
</TABLE>

            (*)   Registered debentures (Series 1) NIS. 1.- par value each.
                  Every NIS. 55.- par value of debentures are convertible into
                  10 ordinary shares NIS. 1.- par value each. The debentures
                  bear interest at an annual rate of 0.1%. The principal,
                  interest and the price for conversion into ordinary shares are
                  linked to the representative rate of exchange of the U.S.
                  dollar and are payable in 4 equal annual installments on
                  November 30 in each of the years commencing in 1999 and ending
                  in 2002. In the current year 2,236,025 debentures (series 1)
                  were converted into shares . As of the balance sheet date,
                  there were 25,263,877 outstanding debentures. The market value
                  of the debentures, as their price was quoted on the Stock
                  Exchange, was NIS. 40,372 thousand at the balance sheet date.


                                      107
<PAGE>   109

NOTE 14 - LONG-TERM LIABILITIES (CONTINUED)

            (**)  Registered debentures (Series 2) NIS. 1.- par value each.
                  Every NIS. 5 par value of debentures are convertible into an
                  ordinary share of NIS. 1.- par value. The debentures bear
                  interest at an annual rate of 2.5%. The principal, interest
                  and the price of conversion into ordinary shares are linked to
                  the representative rate of exchange of the U.S. dollar and are
                  payable in 4 equal annual installments on November 30 in each
                  of the years commencing in 1999 and ending in 2002. In the
                  current year 79,308,820 debentures (series 2) were converted
                  into shares. As of the balance sheet date, there were
                  6,716,869 outstanding debentures. The market value of the
                  debentures, as their price was quoted on the Stock Exchange,
                  was NIS. 10,136 thousand at the balance sheet date.

            Accrued interest is included in "Accounts Payable" in current
            liabilities.

            See also Note 18.a. Regarding collaterals see Note 25.

            The above debentures are traded on the Tel-Aviv Stock Exchange.

      C.    Debentures convertible into shares of a subsidiary

<TABLE>
<CAPTION>
                                                        December 31,    December 31,
                                                             1998           1997
                                                          Adjusted NIS. (thousands)
<S>                                                         <C>            <C>  
            Debentures (Series 1)                              --          2,410
            Less - current portion                             --          2,410

                                                               --             --
                                                            =====          =====
</TABLE>

            The debentures were redeemed on December 26, 1998.

NOTE 15 - CUSTOMERS' DEPOSITS

      a.    Customer deposits of Supergas as of December 31, 1998 are calculated
            on the basis of the expected rate of price updating and according to
            the request of the said company from the Ministry of Industry and
            Commerce for updating. The updated rate for 1998 is 12.77% (previous
            year 5%). The deposits are calculated on the basis of their present
            value at the annual discount rate of 2.75% (previous year - 1.75%).

      b.    Customers' deposits include NIS.41,213 thousand (December 31, 1997 -
            NIS. 44,834 thousand) of linkage increments accrued on those
            deposits (Note 2.L.).

NOTE 16 - LIABILITIES FOR EMPLOYEE RIGHTS UPON RETIREMENT, NET

<TABLE>
<CAPTION>
                                                            December 31,   December 31,
                                                                 1998          1997
                                                             Adjusted NIS. (thousands)
<S>                                                             <C>           <C>  
            Provision for severance pay, net (a)                7,673         6,061
            Less: deposits in approved funds (*)                1,153         1,858
                                                                6,520         4,203
            Provision for early retirement pension (**)(b)      5,583         5,559
            Provision for redemption of unutilized
             sick leave (c)                                     2,060         2,081
     
                                                               14,163        11,843
                                                               ======        ======
</TABLE>


                                      108
<PAGE>   110

      (*)   The deposits can be withdrawn subject to law. Accrued income on the
            deposits is included in the statements of income.

      (**)  Excluding NIS. 2,079 thousand (1997 - NIS. 1,907 thousand) current
            portion of early retirement pension payable which is included in
            "Accounts payable."

      a.    The liabilities of the Company and its subsidiaries in respect of
            pension and severance indemnities are fully covered by provisions
            for severance indemnities, by deposits in approved funds and in
            managers' insurance policies. The deposits in approved funds and in
            manager's insurance plans are not included in the financial
            statements as they are not under the control of the Company.

      b.    The provision for pension benefits for early retirement of employees
            is computed at the discounted present value of the future
            liabilities of the Company for such retired employees. The Company's
            liability for early retirement is up to the date when the employee
            reaches retirement age and is computed as a fixed percentage of
            pensionable salary due to the employee from the pension fund upon
            retirement. The rate of discount for computing the provision is 6%
            per annum (previous year 4.5%).

      c.    In accordance with the labor agreements between subsidiaries and
            their employees, retiring employees (men at age 65 and women at age
            60 - 65) are entitled to receive a partial redemption of unutilized
            sick leave, subject to a ceiling of 50 working days. A provision
            based on an actuarial calcualtion has been made in the financial
            statements for covering the aforesaid liability. The actuarial
            calculation is based, inter alia, on a discount rate of 3%.

NOTE 17 - LINKAGE OF MONETARY BALANCES

<TABLE>
<CAPTION>
                                  December 31, 1998                   December 31, 1997
                                 Linked     Linked to   Unlinked     Linked      Linked to   Unlinked
                                    to       foreign      (**)          to        foreign      (**)
                                  index     currency                  index      currency
                              Adjusted NIS. (thousands)            Adjusted NIS. (thousands)
<S>                             <C>         <C>         <C>         <C>           <C>        <C>    
Assets:

 Cash and cash equivalent            --       6,138       3,622          --        4,588       3,945
 Marketable securities               --          --       8,731          65           --       4,665
 Trade receivables               18,460      47,473     554,533       7,902       34,559     488,114
 Accounts receivable              2,550     106,205      45,223      17,402       13,951      41,305*
 Investment in
  capital notes and loans        20,333          --          --      17,735*          --          --
 Long-term loans                 64,263      10,366       5,889      68,904       10,700       3,005

                                105,606     170,182     617,998     112,008       63,798     541,034
                                =======     =======     =======     =======      =======     =======

Liabilities:

 Credits from banks
  and others                      5,573     209,248     756,726       2,798       35,720     378,769
 Trade payables                   1,028      22,397      51,244       2,922        5,961      47,796*
 Accounts payable                32,378       4,279     108,417      21,557        7,221      69,449
 Long-term liabilities
  and debentures (including
  current portion)               96,607      56,954          46     169,470      214,121          73
 Customers' deposits(**)         63,252          --          --      67,314           --          --
 Capital notes                       --          --         215          --           --         234

                                198,838     292,878     916,648     264,061      263,023     496,321
                                =======     =======     =======     =======      =======     =======
</TABLE>


                                      109
<PAGE>   111

(*)   Reclassified

(**)  Partly bearing interest.

(***) Against the Customers' deposits, Supergas holds fixed assets on loan to
      its customers, which are adjusted to the Index in the financial
      statements. Regarding the linkage of Customers' deposits - see Note 15.

Against the excess of foreign currency linked liabilities over assets in the
amount of NIS. 122,700 thousand, Sonol holds fuel and refined products inventory
amounting to NIS. 147,900 thousand, which is mainly Emergency Inventory valued
according to the changes in the rate of exchange of the U.S. dollar as explained
in note 2.C.1.

NOTE 18 - CAPITAL

      a.    Nominal values.

            Consist of:

<TABLE>
<CAPTION>
                                              Authorized           Issued and Paid
                                             December 31,            December 31,*
                                            1998        1997        1998        1997
                                           NIS. (thousands)        NIS. (thousands)
<S>                                      <C>         <C>         <C>          <C>    
            225,000,000 Ordinary
             shares of NIS. 1.- each     225,000     225,000     138,943      122,674
                                         =======     =======     =======      =======
</TABLE>

            *     138,942,790 ordinary shares (1997 - 122,674,476 ordinary
                  shares). The share capital increased by conversion of
                  debentures into shares. See note 14.B.

      b.    Earnings per ordinary share

            1.    The net income used in computing earnings per NIS. 1.- par
                  value of shares:

<TABLE>
<CAPTION>
                                                              Year ended December 31,
                                                            1998       1997        1996
                                                             Adjusted NIS. (thousands)
<S>                                                       <C>        <C>         <C>   
                  Net income per Statements of Income     58,725     55,494      58,832
                  Add - Profit resulting from
                   conversion of debentures
                   (series 1 and 2)                        9,807         --          --
                  The net income used in computing
                   primary earnings per share             68,532     55,494      58,832
                  Add (Deduct) - theoretical
                   income (loss) deriving from:
                  Exercise of options (series 2)(*)           --         --      10,964
                  Conversion of debentures (series 1)         --      1,341      (2,608)
                  Conversion of debentures (series 2)         --      5,985      (4,317)

                  Net income used in computing
                   diluted earnings per share             68,532     62,820      62,871
                                                          ======     ======     =======
</TABLE>
 
                  *     Expired on February 28, 1997. (The balance of stock
                        options outstanding on December 31, 1996 was 39,984,108
                        options).


                                      110
<PAGE>   112

NOTE 18 - CAPITAL (CONTINUED)

            2.    The par value of shares used in computing earnings per NIS.
                  1.- par value share:

<TABLE>
<CAPTION>
                                                              Year ended December 31,
                                                             ----------------------------
                                                             1998        1997        1996
                                                             ----        ----        ----
                                                             Adjusted NIS. (thousands)
                                                             ----------------------------
<S>                                                       <C>         <C>         <C>    
                  Share capital used in computing
                   primary earnings per share             138,943     122,674     122,674
                  Add - theoretical share capital
                   that may derive from:
                  Exercise of options (series 2)
                  (see 1.above)                                --          --      39,984
                  Conversion of debentures (series 1)          --       6,250       7,500
                  Conversion of debentures (series 2)          --      20,168      24,201
                  The total shares used in computing      -------     -------     -------
                   diluted earnings per share             138,943     149,092     194,359
                                                          =======     =======     =======
</TABLE>

            3.    For examining the probability of conversion or exercise of
                  convertible securities, the present value was computed using a
                  discount rate 6% (12.97 - 4.5%, 12.96 - 4.5%) for securities
                  linked to the Index and 5% (12.97 - 6% 12.96 - 5.5%) for
                  securities linked to the exchange rate of the U.S. dollar.

NOTE 19 - COST OF SALES

            Consist of:

<TABLE>
<CAPTION>
                                                       Year ended December 31,
                                                     ----------------------------
                                                     1998        1997        1996
                                                     ----        ----        ----
                                                       Adjusted NIS. (thousands)
                                                     ----------------------------
<S>                                             <C>         <C>         <C>      
            Petroleum products and other
             materials used*                    1,172,700   1,423,651   1,516,962
            Labor and sub-contract work            13,809      18,383      18,941
            Production costs                      102,720      91,955      64,119
            Depreciation                            3,518       4,148       3,870
            Batteries                              17,100      14,843      17,226
                                                ---------   ---------   ---------
            Total cost of sales                 1,309,847   1,552,980   1,621,118
                                                =========   =========   =========
            Decrease in inventories               (92,632)    (55,586)    (20,263)
                                                =========   =========   =========
</TABLE>

            (*)   Financing income deriving from the erosion of dollar linked
                  credit used as a source of financing purchases of oil
                  inventories is included in Cost of Sales.

NOTE 20 - SELLING AND MARKETING EXPENSES

            Consist of:


                                      111
<PAGE>   113

<TABLE>
<CAPTION>
                                                        Year ended December 31,
                                                     ----------------------------
                                                     1998        1997        1996
                                                     ----        ----        ----
                                                       Adjusted NIS. (thousands)
                                                     ----------------------------
<S>                                               <C>         <C>         <C>    
            Salaries                               86,419      75,407      70,062
            Advertising and promotion              12,609      15,856      14,888
            Depreciation and amortization          74,441      70,610      68,070
            Maintenance of buildings,            
             plants and filling stations           26,926      30,372      32,059
            Rent                                   47,191      40,401      40,886
            Other expenses                         65,507      49,240      50,995
                                                  -------     -------     -------
                                                  313,093     281,886     276,960
                                                  =======     =======     =======
</TABLE>

NOTE 21 - GENERAL AND ADMINISTRATIVE EXPENSES

            (1)   Consist of:

<TABLE>
<CAPTION>
                                                       Year ended December 31,
                                                     ----------------------------
                                                     1998        1997        1996
                                                     ----        ----        ----
                                                      Adjusted NIS. (thousands)
                                                     ----------------------------
<S>                                                <C>         <C>         <C>   
            Salaries                               39,719      32,004      31,661
            Depreciation and amortization           3,900       4,157       3,817
            Consulting, legal and audit             7,521       6,881       6,455
            Provision for doubtful accounts
             and bad debts                          4,416       5,872       2,547
            Other expenses                         13,160      12,579      11,588
                                                  -------     -------     -------
                                                   68,716      61,493      56,068
                                                  =======     =======     =======
</TABLE>

            (2)   Costs of adjustment of computer system to the year 2000

            The costs of adjustment of computer systems to the year 2000 for
            consolidated companies and the Company are estimated in the amount
            of NIS. 540 thousand.

            Costs for the above, charged as current expenses during the year,
            amount to NIS. 130 thousand. See also Note 2.O.

NOTE 22 - FINANCING INCOME (EXPENSES), NET

            Consist of:

<TABLE>
<CAPTION>
                                                       Year ended December 31,
                                                     ----------------------------
                                                     1998        1997        1996
                                                     ----        ----        ----
                                                      Adjusted NIS. (thousands)
                                                     ----------------------------
<S>                                               <C>         <C>          <C>   
            Dollar linked debentures
             convertible to shares                (23,655)    (10,427)     11,844
            Long-term debt                          3,311       3,546       3,719
            Profit(loss) from securities, net      (2,481)      1,634       1,111
            Financing income from
             other receivables                     14,712      14,257      16,604
            Erosion of other monetary
             assets and liabilities, net          (13,928)    (34,965)    (54,765)
                                                  -------     -------     -------
                                                  (22,041)    (25,955)    (21,487)
                                                  =======     =======     =======
</TABLE>


                                      112
<PAGE>   114

NOTE 23 - OTHER INCOME, NET

            Consists of:

<TABLE>
<CAPTION>
                                                       Year ended December 31,
                                                     ----------------------------
                                                     1998        1997        1996
                                                     ----        ----        ----
                                                      Adjusted NIS. (thousands)
                                                     ----------------------------
<S>                                                <C>         <C>          <C>  
            Rent                                    5,662       5,573       4,676
            Dividends received                      1,089       1,050         976
            Management fee                          6,835       7,102       2,331
            Income from construction projects:
            Financial income (1)                      130       2,781          --
            Income from the project (2)             1,440       7,188          --
            Investment in and loan to affiliated
             companies written off (3)             (1,257)     (9,111)         --
            Proceeds from sales of part of
             land (see note 25.C.2.e)               9,562          --          --
            Expenses regarding strike in
             a consolidated company                (2,125)         --          --
            Others                                 (2,274)         97         634
                                                   ------      ------       -----
                                                   19,062      14,680       8,617
                                                   ======      ======       =====
</TABLE>

            (1)   The income results as a consideration for a guarantee given by
                  a consolidated subsidiary in favour of a bank that granted a
                  loan to a third party for financing a building project of
                  residential housing. The income is taken into account
                  concurrently with the progress of the project which is at its
                  final stages of completion.

            (2)   In the year 1997 an agreement was signed between a
                  consolidated subsidiary together with its partners in the
                  project known as "Rubinstein Towers" and Revadim (Properties)
                  Ltd. (hereafter - Revadim), a subsidiary of Bank Hapoalim
                  Ltd., according to which Revadim acquired a material part of
                  the land and building in the project. The building was in its
                  final stages and has been transferred to Revadim as at the end
                  of 1997 (the registration in the Land Registry Office has not
                  yet been completed). The subsidiary company included in its
                  financial statements the above income after taking into
                  account provisions needed, according to the opinion of the
                  management of the company, for completion of the project.

            (3)   Consists of:

                  a.    Decrease in write-off of investment presented at cost
                        (14%) in the amount of NIS. 1,152 thousand resulting
                        from a increase in value (1997 - write off NIS. 3,738
                        thousand, 1996 - NIL)).

                  b.    Provision for the decrease in value of loans granted to
                        and investments in an affiliated company (50%) in the
                        amount of NIS. 300 thousand (1997 - 5,373 thousand, 1996
                        - NIL).

                  c.    Provision for decrease in value of loans granted and
                        investments in an affiliated (50%) in the amount of NIS.
                        2,109 thousand (1997 and 1996 - NIL).


                                      113
<PAGE>   115

NOTE 24 - TAXES ON INCOME

      a.    The Company and most of its subsidiaries are taxed under the Income
            Tax Law (Inflationary Adjustments) - 1985, effective as of the tax
            year 1985, which introduced the measurement of results for income
            tax purposes in real terms. The various adjustments required by the
            above mentioned law are made in order to align taxation to a real
            income basis. Nevertheless, the adjustments of the nominal income
            according to the Income Tax Law are not always identical to the
            inflationary adjustments made in the financial statements in
            accordance with the opinion of the Institute of Certified Public
            Accountants in Israel. As a result, differences arise between the
            adjusted income in the statement of income and the adjusted income
            for income tax purposes. Regarding deferred taxes for these
            differences, see Note 2.J.

            The subsidiary, Vulcan, having the status of an approved enterprise,
            is entitled to a reduced income tax rate in accordance with the Law
            for the Encouragement of Capital Investments - 1959. The period of
            benefits relating to a part of its production facilities has ended
            and for the remaining facilities, the period of benefits will end in
            the year 2001. As of the date of the financial statements, Vulcan
            received final letters of approval for all the investment plans
            which it has carried out.

      b.    Deferred taxes

            The deferred taxes are regarding:

<TABLE>
<CAPTION>
                                 Depreciable    Deductions      Liabilities    Others    Total
                                 fixed assets   and losses      for employee            
                                                carry forward   rights upon             
                                                for tax          retirement             
                                                purposes                                
                                 ------------   -------------    -----------   ------    -----
                                                   Adjusted NIS. (Thousands)
                                 -------------------------------------------------------------
<S>                                <C>               <C>           <C>         <C>      <C>  
            Balance as of                                                               
            January 1, 1997        (22,436)          321            8,342      15,772     1,999
            Changes in 1997:                                                             
            Current*                 5,848           440            1,047        (616)    6,719
            Regarding previous                                                           
             years                   1,938            --               --          --     1,938
                                   -------         -----           ------      ------    ------
            Balance as of                                                                
            December 31,1997       (14,650)          761            9,389      15,156    10,656
                                                                                         
            Changes in 1998:                                                             
            Current                  2,725          (271)             740      (3,359)     (165)
            Regarding previous                                                           
             years                      --            --               --        (151)     (151)
                                   -------         -----           ------      ------    ------
            Balance as of                                                                
            December 31,1998       (11,925)          490           10,129      11,646    10,340
                                   =======         =====           ======      ======    ======
</TABLE>

            *     Includes NIS. 463 thousand accumulated as of the date of
                  acquisition of an initially consolidated subsidiary.


                                      114
<PAGE>   116

NOTE 24 - TAXES ON INCOME (CONTINUED)

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

<TABLE>
<CAPTION>
                                                           December 31,   December 31,
                                                                1998           1997
                                                           ------------   ------------
                                                            Adjusted NIS. (thousands)
<S>                                                           <C>            <C>   
            Future tax benefits - in current assets            6,602          6,589
            Future tax benefits - long-term -in
            "intangible assets and deferred charges, net"      3,738          4,067
                                                              ------         ------
                                                              10,340         10,656
                                                              ======         ======
</TABLE>

      c.    The provision for taxes on income in the statements of income
            consists of:

<TABLE>
<CAPTION>
                                                          Year ended December 31,
                                                        ---------------------------
                                                         1998       1997       1996
                                                        -----      -----       ----
                                                         Adjusted NIS. (thousands)
                                                        ---------------------------
<S>                                                    <C>        <C>        <C>   
            Current taxes including
             inflationary erosion of
             advance tax payments                      46,343     44,675     45,058
            Deferred taxes, net                           316     (8,194)    (3,226)
                                                       ------     ------     ------
                                                       46,659     36,481     41,832
            Provisions (Overprovisions)                         
             pertaining to prior years                    113     (1,277)     (378)
                                                       ------     ------     ------
                                                       46,772     35,204     41,454
                                                       ======     ======     ======
</TABLE>

      d.    Final tax assessments:

            Supergas has received final tax assessements through the tax year
            1994 and Vulcan has received final tax assessments through the tax
            year 1997. Sprint has received final tax assessments through the tax
            year 1996. The Company, Aloc, Sonapco, Chem Ami and Yad Mordechai
            have received final tax assessments through tax year 1991. Sonol has
            received final tax assessments through the tax year 1990.

      e.    Reconciliation between the theoretical tax on the reported income
            and the tax on income included in the statements of income:

<TABLE>
<CAPTION>
                                                           Year ended December 31,
                                                        ----------------------------
                                                        1998       1997         1996
                                                        ----       ----         ----
            Statutory rate of tax                        36%        36%          36%
                                                        ====       ====         ====
                                                          Adjusted NIS. (thousands)
                                                        ----------------------------
<S>                                                   <C>        <C>          <C>   
            The theoretical tax at the
             applicable tax rate                      41,727     32,666       36,440
            Erosion of advanced tax payments           1,266      1,037        1,696
            Differences in the definition of
             capital and assets for tax
             purposes and others, net                  3,666      2,778        3,696
            Overprovisions in respect of prior years     113     (1,277)        (378)
                                                      ------     ------       ------
                                                      46,772     35,204       41,454
                                                      ======     ======       ======
</TABLE>


                                      115
<PAGE>   117

NOTE 25 - COLLATERALS, COMMITMENTS AND CONTINGENT LIABILITIES

      A.    Floating and fixed charges:

<TABLE>
<CAPTION>
                                       December 31, 1998       Collateralized by
                                       -----------------       -----------------
                                    Adjusted NIS. (thousands)
                                    -------------------------
<S>                                         <C>                <C>    
            Short-term bank                                    Floating charges on
             credits                          4,611            current assets of the
                                                               main subsidiaries.
           
            Short-term Loans from banks     961,363            Floating charges on
                                                               current assets of Sonol.
           
            Accounts payable and credit                        Floating charges on
             balances including                                current assets of Sonol
             interest on short-term loans     3,662
           
            Long-term bank loans             93,402            Floating charge on
                                                               current assets of Sonol,
                                                               Sonol Shani Agencies
                                                               Ltd., fixed charges
                                                               on all the assets of
                                                               Vulcan and fixed charges
                                                               on part of the fixed
                                                               assets of Milchen Sonol
                                                               Agency Ltd., Sonol Dan
                                                               Ltd. and Motoricka Ltd.
           
            Investment grants                    --            Floating charges on all
                                                               Vulcan's assets guaran-
                                                               teeing the fulfillment of
                                                               the terms related to the
                                                               receipt of such grants.
                                                               Although final approval
                                                               has been received the
                                                               charges have not yet been
                                                               cancelled.
           
            Convertible debentures                             Floating charge
             (Including interest)            56,924            subordinated to other
                                                               floating charges on all
                                                               the assets of the
                                                               Company.
</TABLE>


                                      116
<PAGE>   118
NOTE 25 - COLLATERALS, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

      B.    Liabilities and contingencies:

            1.    Indemnification and Insurance of directors and senior officers

                  The Articles of Association of the Company enable the
                  indemnification and insurance of directors and senior officers
                  according to the law. The Company insures, subject to
                  provisions of the law, the directors' and senior officers'
                  liability.

            2.    Pending litigation

                  a.    Claims (mainly legal claims) arising in the normal
                        course of business have been lodged against subsidiaries
                        and affiliated companies. Regarding part of the said
                        claims appropriate provisions have been made. In the
                        opinion of the companies' managements, based on the
                        opinions of legal counsel, the provisions made are
                        sufficient.

                  b.    A claim has been submitted against Sonol by a customer
                        owning land leased to Sonol on which a filling station
                        was built, the substance of which is the cancellation of
                        all agreements between Sonol and the plaintiff and a
                        monetary claim against Sonol in the amount of
                        approximately NIS. 6 million. In the opinion of Sonol's
                        legal counsel, the claim's prospects (as far as the
                        monetary claim is concerned) are weak.

                  c.    As a result of arbitration proceedings between the Fuel
                        Authority and the Agents' organization and station
                        owners, in which Sonol was not a party, the arbitrator
                        ruled that the Fuel Authority is to reimburse the
                        station owners for the depreciation on their investments
                        in stations. The arbitrator's ruling was confirmed by
                        the district court. The Fuel Authority, in turn,
                        demanded that the fuel marketing companies reimburse the
                        station owners for the depreciation (to the extent
                        payable) since it claims that the depreciation component
                        was previously recognized by the Fuel Authority within
                        the framework of the Price Structure. In the opinion of
                        Sonol's legal counsel, there is no basis for the Fuel
                        Authority's demand. In accordance with the arbitration
                        ruling, twenty five third party proceedings have been
                        filed by the Government against Sonol regarding claims
                        filed against the Government by station owners for the
                        reimbursement of the investment in the construction of
                        stations. The total amounts to NIS. 39 million and, in
                        the opinion of the company's legal counsel, there is no
                        basis for these claims as far as they relate to Sonol.

                  d.    Three claims were lodged against an affiliated company
                        and against its shareholders, which include Sonol. The
                        total amount of the claims is approximately NIS. 59.4
                        million relate to the sale of fuel products pursuant to
                        restrictive trade practices (as the plaintiff alleges)
                        among the fuel companies. In the opinion of the legal
                        counsels of Sonol and the affiliated company, the
                        companies have a sound defense against the claims.


                                      117
<PAGE>   119

NOTE 25 - COLLATERALS, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

                  e.    A filling station operator, who received operating
                        rights within the framework of an arrangement between
                        invalids and the rehabilitation department of the
                        Ministry of Defense, the Israel Lands Authority and the
                        fuel companies, has filed a claim in court against Sonol
                        for a ruling declaring the cancellation of agreements
                        between him and Sonol, claiming them to be restrictive
                        trade agreements in accordance with the Law for
                        Restrictive Trade Agreements. In the opinion of Sonol's
                        legal counsel, it is too early to determine the
                        defense's prospects at this early stage of
                        deliberations.

                  f.    On December 10, 1998 the owners of one of Sonol's
                        agencies filed a claim against Sonol in the amount of
                        approximately NIS. 30 million on account of various
                        losses incurred, in their opinion, as a result of
                        Sonol's stopping to supply them with fuel products and
                        on account of other obligations that Sonol did not
                        fulfill. The owners have asked the court to declare all
                        agreements entered into between them and Sonol null and
                        void. Sonol, on January 10, 1999 filed its defense in
                        which it denied and refuted all the plaintiff's claims.
                        In Sonol's estimation, the Agency's owners' chances of
                        success are not high and Sonol has a reasonable chance
                        of defending its position.

                        On January 21, 1999 Sonol filed a claim against the
                        owners of the same Agency in the amount of approximately
                        NIS. 31 million on account of the non-payment of amounts
                        due on account of fuel products supplied to them,
                        compensation on account of various damages incurred, and
                        also asked the court to enforce a memorandum of
                        agreement signed by the parties on March 22, 1998. On
                        February 8, 1999 Sonol filed an additional, separate
                        claim in the amount of approximately NIS. 6.7 million
                        against the owners of the agency on account of an unpaid
                        balance of a loan. At this time, the defendants have not
                        submitted their defense, and therefore, it is difficult
                        to estimate the chances of success of the first claim,
                        while there appears to be a good chance of success in
                        the second claim.

                  g.    A request for approval by the court of a law suit as a
                        class action for payment of compensation was filed
                        against the consolidated company Supergas, Pazgas (1993)
                        Ltd. and Amisragas, the American Israeli Gas Corporation
                        Ltd.

                        The suit involves two main claims raised by the
                        plaintiffs - the Consumer Protection Authority and three
                        customers. The first - that the gas companies marketed
                        to customers gas in cylinders in lesser quantities than
                        the quantities declared with respect to two types of
                        common cylinders (13 and 48 Kilogram), the second - that
                        at the time the cylinders are returned to the gas
                        companies, unused quantities of gas remain in the
                        cylinders and, despite this, the gas companies do not
                        credit the customers for the returned gas. The
                        plaintiffs did not specify the precise amounts they are
                        claiming, but they estimated that the amount of the
                        claim against all the gas companies for the last 10
                        years totals approximately NIS. 3 billion. The
                        plaintiff's motion for court approval as a class action
                        was denied.


                                      118
<PAGE>   120

NOTE 25 - COLLATERALS, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

                  h.    A group of greenhouse owners, claiming damage caused to
                        them in the amount of approximately NIS. 7.6 million as
                        a result of using defective light fuel oil produced by
                        the Oil Refineries Ltd. and sold to them by the oil
                        marketing companies, has filed a claim against the
                        consolidated company, Sonol Israel Ltd., Oil Refineries
                        Ltd., Paz Oil Company Ltd., Delek the Israel Fuel
                        Corporation Ltd. and Alon Israel Oil Company Ltd. In the
                        opinion of Sonol's Management, Sonol has a sound
                        defense against this claim and has, in addition,
                        insurance coverage included in a product liability
                        policy.

                  i.    Two filling station owners have filed claims in court
                        against the consolidated company, Sonol, in the amount
                        of approximately NIS. 10 million, claiming that the
                        Company owes them commission differentials on account of
                        prior years. At this time, it is too early to estimate
                        the prospects of the success of these claims.

      C.    The consolidated subsidiary companies are committed as of balance
            sheet date as follows:

<TABLE>
<CAPTION>
            1.    Commitments:                                 Adjusted NIS. (thousands)
                                                               -------------------------
<S>                                                                     <C>
                  Acquisition of fixed assets                           300,844
                  Suppliers of fuel, luboils and parts                   88,387
                  Rental leases and obligations in accordance
                   with signed agreements with agencies
                   for the use of their outlets for marketing
                   Sonol's products over various periods(*)             461,511
                  Acquisition and maintenance of
                   a computer  and other equipment
                   over periods of up to five years                       2,559
                 
            (*)   The rental liability for each of the years
                  following December 31, 1998 is as follows:
                 
                      1999                                               39,942
                      2000                                               38,116
                      2001                                               29,924
                      2002                                               27,640
                      2003                                               26,227
                      2004 and thereafter                               299,662
                                                                        -------
                                                                        461,511
                                                                        =======
</TABLE>

            2.    Commitments for investments:

                  a.    In 1996 a consolidated company signed an agreement for
                        its participation in a limited partnership to establish
                        a tourist attraction. The investment by the consolidated
                        subsidiary (including loans and guarantees) is expected
                        to reach an amount of up to NIS. 17,500 thousand linked
                        to the representative rate of the U.S. dollar, for which
                        it will obtain a 35% share in the limited partnership.
                        As of the balance sheet date, the Company invested
                        approximately NIS. 2,800 thousand.


                                      119
<PAGE>   121

NOTE 25 - COLLATERALS, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

                  b.    In 1997, a consolidated company, signed an agreement to
                        invest in a venture capital fund the amount of
                        approximately NIS. 5,000 thousand. As of the balance
                        sheet date, the company has invested approximately NIS.
                        1,900 thousand.

                  c.    In 1997, a consolidated company signed an agreement to
                        acquire rights to land and a building to which its
                        offices will be relocated. The company committed itself
                        to invest NIS. 21,700 thousand, of which approximately
                        NIS. 18,400 thousand has been paid as of the balance
                        sheet date.

                  d.    In 1998, a consolidated company entered into an
                        agreement to invest approximately NIS. 2,000 thousand in
                        a venture capital fund. As of the balance sheet date,
                        NIS. 360 thousand has been invested.
                  e.    In 1998, a consolidated company entered into an
                        agreement to sell 50% of its rights in a plot of land
                        situated in Tel-Aviv for an amount of NIS. 30,600
                        thousand, linked to the Consumer Price Index. The
                        balance not yet received as of the balance sheet date
                        amounts to approximately NIS. 14,000 thousand. The
                        Company also signed an agreement with the buyer to
                        construct a joint building project on the land. The
                        project will include, inter alia, a 20 story office
                        building covering an area of approximately 23,000 m. and
                        underground parking facilities. The project is currently
                        in the planning stages and agreements with building
                        contractors have not yet been signed. In addition, the
                        Company signed an agreement whereby it agreed to pay
                        approximately NIS. 11.3 million, linked to the Consumer
                        Price Index, to the city of Tel-Aviv.

            3.    Other commitments

                  On June 1, 1998 the Company signed a Financial Incentive
                  ("award") Agreement with its senior managers based on the
                  appreciation in the value of the Company's common stock.

                  The award program is a cash payment for the appreciation in
                  the value of approximately 2.3 million of the Company's common
                  stock (correct as of December 31, 1998 after adjustment for
                  convertible securities).

                  The appreciation in value of the common stock is computed
                  according to the difference between the price of shares on the
                  stock exchange at the date of the manager's notice of the
                  exercise of his right, and between the stipulated basis price
                  of the shares (471 points), as adjusted for the Consumer Price
                  Index known on the date of exercise of the right.

                  The basis price and the number of shares in the program are
                  subject to adjustments for distribution of bonus shares,
                  conversion of convertible securities, exercise of rights by
                  common shareholders, merger or disolution of the Company and
                  distribution of dividends.

                  Pursuant to the Agreement, the award is granted in three
                  installments. Up to December 31, 1998, the right of the
                  managers to exercise two portions was vested, and of which
                  notice to exercise the rights for one portion was given. The
                  right to exercise the final portion will commence December 31,
                  1999.


                                      120
<PAGE>   122

NOTE 25 - COLLATERALS, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

                  Compensation expenses related to the award program are
                  recorded in the profit and loss statement on the accrual basis
                  for each of the portions according to the vesting period from
                  the date of the Agreement and until the date of the vesting of
                  the right to exercise. The amount recorded as compensation
                  expense as of the balance sheet date was NIS. 4,982,000. The
                  unrecorded amount relating to the balance of the vesting
                  period, based on the price of the shares and the number of
                  shares outstanding as of December 31, 1998, totalled NIS.
                  896,000.

      D.    The consolidated subsidiaries have contingent liabilities as of the
            balance sheet date in respect of:

<TABLE>
<CAPTION>
                                                               Adjusted NIS. (thousands)
                                                               -------------------------
<S>                                                                     <C>
            1.    The consolidated subsidiary Supergas has
                  given a guarantee in favor of a bank
                  regarding a loan given by the bank to a
                  partnership (in which Supergas is a
                  partner). The loan has been repaid, but
                  the guarantees have not yet been cancelled               --

            2.    Various guarantees.                                   5,538

            3.    Sonol is a guarantor to a bank for loans
                  granted by the bank to a filling station
                  owner who has leased the station to Sonol.            3,453

            4.    Sonol is a guarantor to a bank on account
                  of a loan granted by the bank to one of
                  Sonol's agencies.                                       972

            5.    Sonol has given a guarantee to one of its
                  customers on account of a tender for the
                  supply of fuel products.                              2,000

            6.    Vulcan has given a guarantee to a
                  government agency assuring the supply of
                  its products. The guarantee is
                  collateralized by a floating charge on all
                  the assets of Vulcan.                                   330

            7.    Sonol is a guarantor to a bank on account
                  of a loan granted by the bank to an
                  affiliated company for financing acquired
                  equipment.                                              832

            8.    Sonol has guaranteed compensation to one
                  of its suppliers for any damages caused to
                  the supplier as a result of the temporary
                  remedy given to Sonol by the court, if it
                  becomes evident that there was no basis
                  for Sonol's request from the court.                   1,170

            9.    Sonol is a guarantor to a bank in respect
                  to an agreement entered into with the city
                  of Tel-Aviv                                           3,046

            10.   The Company is a guarantor to a bank on
                  account of its part in a consortium which
                  will compete in a tender offer for the
                  building of a power plant                             1,830
</TABLE>


                                      121
<PAGE>   123

NOTE 25 - COLLATERALS, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

<TABLE>
<S>                                                                     <C>
            11.   Sonol is a guarantor to a bank on account
                  of a loan taken by one of its affiliated
                  companies.                                            1,150

            12.   As part of legal proceedings currently
                  being heard against customers of a
                  subsidiary company regarding the
                  collection of open balances, the court has
                  required that such subsidiary provide
                  suitable guarantees                             Unlimited amount

            13.   The consolidated company, Granite Hacarmel
                  Properties (1993) Ltd., has given a
                  guarantee to a Government agency
                  guaranteeing the payment of all debts
                  relating to the sale of a plot of land                4,415

            14.   Guarantees given to Customs and Excise
                  Department for payment of customs duty,
                  purchase and other taxes that may be due
                  to that Department by the Company, Sonol
                  and a related Company.                          Unlimited amount
</TABLE>

      E.    Credit Risks

            1.    The maximal credit risks of the Company regarding its
                  financial assets do not exceed the book value of the financial
                  assets less the existing collaterals held by the Company.

            2.    Concentration of credit risks are created by the fact, that
                  the consolidated company's customers and long-term receivables
                  (long-term loans granted) are of similar character
                  (independent fuel agencies). The highest balance is that of an
                  agent whose current balance (included in trade receivables)
                  and whose long term balance (included in long-term loans)
                  total approximately NIS. 55 million. Against a portion of
                  amounts due from customers, the Company has collateral as is
                  acceptable in the industry. The financial statements include
                  specific provisions for receivables the collection of which is
                  doubtful in the opinion of the management.

      F.    Uncertainity resulting from modifying of computer systems to the
            year 2000

            The issue of the year 2000 derives from the design of many computer
            systems alloting two places instead of four in identifying the year.
            In relating to dates, systems might identify the year 2000 as the
            year 1900 or any other date, thus causing mistakes in processing
            data in the year 2000. In addition, similar problems may arise in
            systems using various dates in the year 1999 to reflect items other
            than the date. Effect of the year 2000 issue may occur prior to, on
            or after January 1, 2000. Inadequate attention to the aforesaid
            problems may influence the activities of the Company and affect
            financial reporting. The magnitude of the problem will vary with the
            circumstances and may manifest itself as insignificant mistakes or
            in the collapse of whole systems which may affect the organization's
            ability to continue normal operations. There is no way to ascertain
            that a complete solution to all aspects of the year 2000 issue
            affecting the organization will be found including those relating to
            the efforts of customers, suppliers or other outside parties.


                                      122
<PAGE>   124

NOTE 26 - RULING BY THE CONTROLLER OF RESTRICTIVE TRADE PRACTICES AND PROPOSED
          LAW FOR THE FUEL SECTOR

      A.    Sonol and Delek, the Israel Fuel Corporation Ltd.(hereinafter
            "Delek") jointly own the rights to "Dalkan 2000", a computerized
            system for marketing fuel products (primarely to automobile fleets).
            On January 26, 1997, the Controller of Restrictive Trade Practices
            ruled that the joint marketing arrangement of the "Dalkan 2000"
            system by Sonol and Delek is a restrictive trade agreement. As a
            result of the position taken by the Controller, both Sonol and Delek
            agreed to separate the "Dalkan 2000" system between themselves so
            that each company will operate an independent system in a manner
            that will enable customers, in accordance with their own preference,
            to enter into an agreement with either of the companies. The
            separation agreement was implemented during 1998.

      B.    A private legislative proposal dealing with the shortening of the
            terms of exclusive agreements entered into between the fuel
            marketing companies and filling station owners and operators passed
            its first reading in the previous Knesset. The Economics Committee
            of the current Knesset decided that the rule of "Continuity" will be
            in effect regarding this proposal, and to initially require the
            legislation of rules regarding future commitments of the fuel
            companies with filling station owners and only, thereafter, to deal
            with the issue of exclusive agreements entered into in the past.
            Subsequently, the Law of the Fuel Economy (Promotion of Competition
            (Correction) 1998, was enacted in July, 1998. The Law deals with
            future commitments by the fuel companies and empowers the Minister
            of National Infrastructures to determine rules after consulting with
            the Controller of Restrictive Trade Agreements and after having
            received approval by the Economics Committee of the Knesset,
            regarding automatic filling systems (Dalkanim and Pazomatim) and
            their operation. These rules will apply to all the fuel companies.

      C.    A draft proposal of legislation by the Ministry of Energy and
            Infrastructure regarding the term of exclusive contracts between the
            fuel marketing companies and station owners has been forwarded to
            government ministries, the president of the Supreme Court and law
            faculties for their initial comments.

      D.    As part of the Ministry of Energy's policy to separate the holding
            of Emergency Inventories of crude oil and product inventories from
            the companies' operating inventories, the Fuel Authority has
            designated several tanks at various storage locations for the
            holding of Emergency Inventories, effective as of July 1, 1998.
            Furthermore, a tender offer has been published to determine the
            party which will hold the Emergency Inventories, which have to date
            been held by the major fuel marketing companies. The final date for
            the tender has been postponed.

            At this time, it is too early to estimate the effects of the said
            developments on the overall Israeli fuel market in general, and on
            Sonol in particular.

NOTE 27 - TRANSACTIONS AND BALANCES WITH INTERESTED AND RELATED PARTIES

      a.    Income and expenses from interested and related parties.

            1.    Consist of:


                                      123
<PAGE>   125

<TABLE>
<CAPTION>
                                                            Year ended December 31,
                                                          --------------------------
                                                1998                  1997                  1996
                                              -------                ------                ------
                                                          Adjusted NIS. (thousands)
                                              ---------------------------------------------------
                                        Interested  Related   Interested  Related   Interested  Related
                                        parties     parties   parties     parties   parties     parties
                                        ----------  -------   ----------  -------   ----------  -------
<S>                                       <C>         <C>       <C>         <C>          <C>      <C>
                  Financing expenses        131         111     1,217         142        84          --
                                                                                                
                  Financing income           --         348        --         489        --         545
                                                                                                
                  Income from                                                                   
                  Management Services        --       6,835        --       6,848        --       2,331
                                                                                                
                  Purchases               9,929          --        --          --        --          --
</TABLE>

            2.    Transactions with interested and related parties are conducted
                  in the normal course of business and according to normal
                  credit terms and do not exceed 10 % of the company's
                  transactions. The Company has been granted an exemption in
                  accordance with paragraph 64(3)D of the Securities Regulations
                  [Preparation of Annual Financial Statements(correction)]-1995
                  from the requirement to disclose transactions with interested
                  parties and affiliated companies made during the normal course
                  of business of the Company.

            3.    Sonol purchases most of the fuel products from Oil Refineries
                  Ltd., which is obligated to supply its products to the fuel
                  marketing companies at the refinery gate price which is under
                  government control.

      b.    Benefits to interested parties

<TABLE>
<CAPTION>
                                                        Year ended December 31,
                                           Number    ----------------------------
                                             of      1998         1997      1996
                                           persons   ----         ----      ----
                                           -------     Adjusted NIS. (thousands)
                                                     ----------------------------
<S>                                          <C>    <C>          <C>       <C>
            1.    Interested party         
                  employed by the company     1     6,437*       1,527     1,417
                                           
            2.    Directors                  22       706          720       529**
</TABLE>

            *     Includes NIS. 3,606 thousand on account of severance
                  arrangements and an incentive award (Note 25.c.3).

            **    Includes overprovision from 1995 in the amount of NIS. 218
                  thousand.


                                      124
<PAGE>   126

NOTE 27 - TRANSACTIONS AND BALANCES WITH INTERESTED AND RELATED PARTIES
          (CONTINUED)

      c.    Balances with interested and related parties

<TABLE>
<CAPTION>
                                         December 31, 1998           December 31, 1997
                                      ----------------------       ---------------------
                                                   Adjusted NIS. (thousands)
                                      --------------------------------------------------
                                      Interested    Related        Interested   Related
                                      parties       parties        parties      parties
                                      ----------    -------        ----------   -------
<S>                                    <C>           <C>            <C>          <C>
            Current assets:                                                    
             Trade receivables             --           669          9,801        2,838
             Accounts receivable           --            66             --          753
                                        -----         -----         ------        -----
                                           --           735          9,801        3,591
                                        =====         =====         ======        =====
                                                                               
            Loans and capital notes                                            
             to subsidiary companies                 20,333                      17,735
                                                     ======                      ======

             The highest balance with                                          
              interested parties                                               
              during the year          11,860                       10,309     
                                       ======                       ======     

            Current liabilities:                                               
             Credits from banks                                                
             and others                    --         5,573             --        2,798
             Trade payables             9,929         3,204             --        2,585
             Accounts payable              --           375             --          280
                                       ------         -----         ------        -----
                                        9,929         9,152             --        5,663
                                       ======        ======         ======        =====

            The highest balance                                                
             with interested                                                   
              parties during                                                   
              the year                  9,929                       16,786     
                                       ======                       ======     

            Commitment to purchase                                             
             fuel products from                                                
             an interested party       11,939                           --     
                                       ======                       ======     
</TABLE>


                                      125
<PAGE>   127

NOTE 28 - SUBSEQUENT EVENT

      1.    Subsequent to the balance sheet date, Sonol, as part of the group's
            reorganization, transferred all its holdings of shares in Vulcan
            Batteries Ltd. (approximately 84%) to the Company. The transfer was
            made at market prices and has not effect on the Company's Financial
            Statements.

      2.    Subsequent to the balance sheet date, the Company concluded an
            agreement to purchase the 50% remaining balance of ownership and
            control (shares and shareholders' loans) in Otzem Promotion and
            Investments (1991) Ltd. for the shekel equivalent of approximately
            $ 800 thousand.

NOTE 29 - FINANCIAL STATEMENTS TRANSLATED INTO U.S. DOLLARS

      The financial records of the Company and its consolidated subsidiaries are
      maintained on a current basis in historical nominal New Israel Shekels.

      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. Despite the
      significant reduction in Israel's rate of inflation, the Company has
      continued to prepare its consolidated financial statements in U.S. dollars
      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.

                           CONSOLIDATED BALANCE SHEETS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                     Translated to U.S. Dollars
                                                            December 31,
                                                    -----------------------------
                                                        1998             1997
                                                        ----             ----
<S>                                                  <C>              <C>    
Current assets
 Cash and cash equivalents                             2,368            2,220
 Marketable securities                                 2,099            1,232
 Trade receivables                                   149,228          138,228
 Accounts receivable                                  41,396           23,688*
 Inventories                                          48,642           76,737
                                                     -------          -------
                                                     243,733          242,105
                                                     -------          -------
Investments, long-term loans and debit balances
 Subsidiaries, affiliated companies and others        37,858           36,766
 Long-term loans                                      19,356           21,509
 Future tax benefits                                       2              623
                                                     -------          -------
                                                      57,216           58,898
                                                     -------          -------
Fixed assets
 Cost                                                268,717          246,381
 Less: Accumulated depreciation                      125,378          112,240
                                                     -------          -------
                                                     143,339          134,141
                                                     -------          -------
Intangible assets and deferred charges, net           12,612           12,564
                                                     -------          -------
                                                     456,900          447,708
                                                     =======          =======
</TABLE>

* Reclassified.


                                      126
<PAGE>   128

NOTE 29 - FINANCIAL STATEMENTS TRANSLATED INTO U.S. DOLLARS (CONTINUED)

                           CONSOLIDATED BALANCE SHEETS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                      Translated to U.S. Dollars
                                                     ----------------------------
                                                              December 31,
                                                     ----------------------------
                                                          1998             1997
                                                          ----             ----
<S>                                                    <C>              <C>    
Current liabilities
  Credits from banks and others                        255,839          127,285
  Current portion of convertible debentures              3,091           11,387
  Trade payables                                        17,998           14,763*
  Accounts payable                                      34,861           25,729
                                                       -------          -------
                                                       311,789          179,164
                                                       -------          -------
Long-term liabilities
  Long-term loans                                          860           25,365
  Debentures convertible into shares
   of the company (I)                                    9,772           43,161
  Customers' deposits                                   15,205           17,526
  Liabilities for employee rights upon retirement, net   3,405            3,084
  Capital notes issued by a consolidated company            52               61
                                                       -------          -------
                                                        29,294           89,197
                                                       -------          -------
Minority interest                                        3,152            2,813
                                                       -------          -------
Shareholders' equity                                   112,665          176,534
                                                       -------          -------
                                                       456,900          447,708
                                                       =======          =======
</TABLE>

* Reclassified


                                      127
<PAGE>   129

NOTE 29 - FINANCIAL STATEMENTS TRANSLATED INTO U.S. DOLLARS (CONTINUED)

                        CONSOLIDATED STATEMENTS OF INCOME
                                 (In thousands)

<TABLE>
<CAPTION>
                                                  Translated to U.S. Dollars
                                                -------------------------------
                                                    Year ended December 31,
                                                -------------------------------
                                                   1998        1997        1996
                                                   ----        ----        ----
<S>                                             <C>         <C>         <C>    
Revenues:
 Sales                                          793,106     873,668     871,091
 Less: Government imposts                       339,228     352,963     337,685
                                                -------     -------     -------
 Net sales                                      453,878     520,705     533,406
 Other income, net                                6,833       5,137       2,777
                                                -------     -------     -------
                                                460,711     525,842     536,183
                                                -------     -------     -------
Costs and expenses:
 Cost of sales                                  327,708     403,680     417,201
 Selling, general and
  administrative expenses                        76,162      70,695      68,804
 Depreciation and amortization                   15,634      14,251      12,756
 Financing expenses, net                          5,903       7,558       6,033
                                                -------     -------     -------
                                                425,407     496,184     504,794
                                                -------     -------     -------
Operating income before taxes on income          35,304      29,658      31,389
Taxes on income                                  11,695      10,494      10,554
                                                -------     -------     -------
Operating income after taxes on income           23,609      19,164      20,835
Company's share in income (loss)
 of affiliates, net                               1,052       (865)           2
Minority interest in income
 of consolidated subsidiaries                      (215)        10         (557)
                                                -------     -------     -------
Net income for the year                          24,446      18,309      20,280
                                                =======     =======     =======

Earnings per ordinary share:

Primary                                            0.18        0.15        0.17
                                                   ====        ====        ====
                                                                          
Fully diluted                                      0.18        0.13        0.14
                                                   ====        ====        ====
</TABLE>


                                      128
<PAGE>   130

NOTE 29 - FINANCIAL STATEMENTS TRANSLATED INTO U.S. DOLLARS (CONTINUED)

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (In thousands)

<TABLE>
<CAPTION>
                                                       Translated to U.S. Dollars
                                                     --------------------------------
                                                                          Other
                                                                          Accumulated
                                      Common  Capital         Retained    Comprehensive
                                      Stock   Reserves(II)    Earnings    income*          Total
                                      ------- ------------    --------    -------------    -----
<S>                                   <C>        <C>            <C>          <C>          <C>    
Balance as at January 1, 1996:        55,735     36,006         62,826           --       154,567

Changes in 1996:

Net income for the year                   --         --         20,280           --        20,280

Dividend paid                             --         --         (8,520)          --        (8,520)

                                      ------     ------       --------      -------      --------
Balance as at December 31, 1996       55,735     36,006         74,586           --       166,327

Changes in 1997:

Net income for the year                   --         --         18,309           --        18,309

Unrealized gains on
securities                                --         --             --          379           379

Dividend paid                             --         --         (8,481)          --        (8,481)
                                      ------     ------       --------      -------      --------
Balance as at December 31, 1997       55,735     36,006         84,414          379       176,534

Changes in 1998:
Issuance of shares                     3,864     28,300**           --           --        32,164

Net income for the year                   --         --         24,446           --        24,446

Unrealized gain (losses)
 on securities                            --         --             --         (249)         (249)

Reclassification adjustment
 for gains included in net income         --         --             --         (146)         (146)

Proceeds from the sale of
 the Company's shares by a
 consolidated company, net                --         22             --           --            22

Dividend paid                             --         --       (120,106)          --      (120,106)
                                      ------     ------       --------      -------      --------
Balance as at December 31, 1998       59,599     64,328        (11,246)         (16)      112,665
                                      ======     ======       ========      =======      ========
</TABLE>

*     Deriving from unrealized gains (losses) on marketable securities. Tax
      effect is immaterial.

**    Net of shares' issuance expenses in the amount of $ 420 thousand.


                                      129
<PAGE>   131

NOTE 29 - FINANCIAL STATEMENTS TRANSLATED INTO U.S. DOLLARS (CONTINUED)

      (I)   During 1992, the Company completed an initial public offering of
            shares, options and debentures, as well as a second public offering
            of debentures and options to purchase debentures.

            The proceeds of the public offerings have been allocated to the
            securities issued on the basis of their fair market prices at the
            beginning of trading on the stock exchange. As a result, the
            debentures are carried at their discounted values as follows:

<TABLE>
<CAPTION>
                                                        U.S. Dollars (thousands)
                                                       --------------------------
                                                              December 31,
                                                       --------------------------
                                                          1998             1997
                                                          ----             ----
<S>                                                     <C>              <C>   
            Debentures (Series 1 and 2) - face value    13,677           55,258
            Discount (Series 1) (*)                        814            1,339
                                                        ------           ------
                                                        12,863           53,919
            Less current portion                         3,091           10,758
                                                        ------           ------
                                                         9,772           43,161
                                                        ======           ======
</TABLE>

            (*)   The discount is being amortized over the remaining period
                  until maturity.

            See note 14.B.

      (II)  The Company's policy is to record long-lived assets at cost,
            amortizing these costs over the expected useful life of the related
            assets. In accordance with Statement of Financial Accounting
            Standards No. 121 ("SFAS 121") "Accounting for the impairment of
            Long-lived Assets and for Long-lived Assets to be disposed of,"
            these assets are reviewed on a quarterly and annual basis for
            impairment whenever events or changes in circumstances indicate that
            the carrying amounts of the assets may not be reasonable.
            Furthermore, the assets are evaluated for continuing value and
            proper useful lives by comparison to expected future cash flows. For
            the year ended December 31, 1998, the adoption of SFAS 121 did not
            have a material effect on the Company.

                  LIST OF THE MAIN SUBSIDIARIES AND AFFILIATES

<TABLE>
<CAPTION>
                                                          Holding and Control
                                                          at balance sheet date
                                                          ---------------------
                                                                    %
                                                                   ---
<S>                                                                <C>
Consolidated Subsidiaries
-------------------------
Sonol Israel Ltd.                                                  100
Vulcan Batteries Ltd.                                               84
Sprint Motors Ltd.                                                 100
Sprint Motors Agencies (1995) Ltd.                                 100
Milchen Sonol Agency Ltd.                                           67
Sonol J-M Ltd.                                                      70
Sonol Dan (1992) Ltd.                                              100
Allied Oils and Chemicals Ltd.                                     100
Sonol Yad Mordechai (1972) Ltd.                                     59
Chem Ami Ltd.                                                      100
Sonapco Bank Street Corporation                                    100
Supergas Israel Gas Distribution Company Ltd.                      100
Supergas Hanegev Ltd.                                               65
Supergas Rehovot 89 Ltd.                                            90
Supergas Heating (1984) Ltd.                                       100
Granite Hacarmel Holdings (1993) Ltd.                              100
Granite Hacarmel Properties (1993) Ltd.                            100
Granite Hacarmel O.Y. Holdings Ltd.                                100
</TABLE>


                                      130
<PAGE>   132

<TABLE>
<S>                                                                <C>
Granite Hacarmel Development Holdings Ltd.                         100
Granite Hacarmel Development Ltd.                                  100
Granite Hacarmel Industries Holdings Ltd.                          100
Granite Hacarmel Industries Ltd.                                   100
Granite Hacarmel Y.A. Holdings Ltd.                                100
Granite Hacarmel NZV Holdings Ltd.                                 100
Granite Hacarmel Motoricka Holdings Ltd.                           100
Granite Hacarmel Energy (1997) Ltd.                                100
Granite Hacarmel Energy Holding Ltd.                               100
Sonol Agencies Shovas (1996) Ltd.                                   60
Sonol Cnaan Ltd.                                                    51
Sonol Shani Agencies Ltd.                                           51
M. Solomon & Co. Gas Agencies Ashkelon Ltd.                         51

Affiliated Companies
--------------------
Aviation Services Ltd.                                              22.5
Tanker Services Ltd.                                                25
United Petroleum Export Company Ltd.                                25
Otzem Promotion and Investments (1991) Ltd.                         50
Texma Chemicals Ltd.                                                50
Yarok Az Ltd.                                                       22.9
Etzion Gas Products (1998) Ltd.                                     50
Lev Magor Management and Services Ltd.                              50
Park Cible Management and Holdings Ltd.                             50
Nitzba Holdings (1995) Ltd.                                         10.4
Orpak Industries (1983) Ltd.                                        10
Sonor Ltd.                                                          50
Park Mini Israel - Limited Patnership                               35
Mini Israel Ltd.                                                    35
</TABLE>

The above list does not include inactive and/or immaterial affiliated companies
and other companies.


                                      131
<PAGE>   133


                    [LETTERHEAD OF DELOITTE TOUCHE TOHMATSU]

                           [BRIGHTMAN ALMAGOR & CO.]

                      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 the consolidated
Partnership as of December 31, 1998 and 1997, and the related statements of
operations, changes in shareholders' equity and cash flows of the Company for
each of the three years in the period ended December 31, 1998, and the
consolidated statements of operations and of cash flows for each of the two
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's Board of Directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We did not audit the financial statements of a partnership, whose assets
constitute approximately 40% of consolidated total assets as of December 31,
1998 (approximately 11% as of December 31, 1997). The financial statements of
the partnership were audited by other auditors whose reports have been furnished
to us and our opinion, insofar as it relates to the amounts included in respect
of the aforementioned partnership, is based solely on the reports of the other
auditors.

We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed by the Auditors' Regulations (Auditor's
Mode of Performance) - 1973. For purposes of these financial statements, there
are no material differences between generally accepted auditing standards in
Israel and those 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 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.

The aforementioned financial statements have been prepared on the basis of
historical cost, adjusted for changes in the general purchasing power of the
Israeli currency in accordance with pronouncements of the Institute of Certified
Public Accountants in Israel. A summary of the Company's nominal data, which
serve as the basis for the adjusted financial statements, are presented in Note
25.

In our opinion, based on our audits and the reports of the other auditors, the
financial statements present fairly, in all material respects, the financial
position - of the Company and on a consolidated basis - as of December 31, 1998
and 1997, the results of activities, the changes in shareholders' equity and
cash flows of the Company and on a consolidated basis - for each of the three
years and two years, respectively, in the period ended December 31, 1998 in
accordance with generally accepted accounting principles in Israel which, with
respect to these financial statements, are substantially identical to generally
accepted accounting principles in the U.S., except as detailed in Note 24 to the
financial statements.

Pursuant to Section 211 of the Companies Ordinance (New Version) - 1983, we
hereby state that we received all of the information and explanations which we
requested and that our opinion on the financial statements is given based on the
best of the information and explanations which we received and as reflected in
the books of the Company.


/s/ Brightman Bar-Levav Friedman & Co.
Brightman Bar-Levav Friedman & Co.
Certified Public Accountants

Tel Aviv, February 16, 1999


                                      132

<PAGE>   134


                        [LETTERHEAD OF SHLOMO ZIV & CO.]

                     AUDITORS' REPORT TO THE SHAREHOLDERS OF

                          AMPAL ENGINEERING (1994) LTD.


We have audited the balance sheet of Ampal Engineering (1994) Ltd. as at
December 31, 1996 and 1995, the related statements of income, statements of
changes in shareholders' equity and the statements of cash-flows for each of the
three years, the latest ended December 31, 1996, 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 generally accepted auditing
standards, including those prescribed under the Israeli Auditors Regulations
(Auditor's Mode of Performance), 1973 and accordingly, we have performed such
auditing procedures as we considered necessary in the circumstances. For
purposes of these financial statements, there is no material difference between
generally accepted Israeli auditing standards and auditing standards generally
accepted in the U.S. These standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement, 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 presentations. We believe that our
audits provide a reasonable basis for our opinion.

The above statements have been prepared on the basis of the historical cost as
adjusted for the changes in the general purchasing power of the Israel currency,
in accordance with opinions issued by the Institute of Certified Public
Accountants in Israel. Condensed statements in historical values which formed
the basis of the adjusted statements appear in Note 7 to the financial
statements.

                                      133

<PAGE>   135


In our opinion, the above mentioned financial statements present fairly, in
conformity with generally accepted accounting principles, in all material
respects, the financial position of the Company as at December 31, 1996 and
1995, the results of its operations, the changes in its shareholders' equity and
cash-flows for each of the three years, the latest ended December 31, 1996, in
conformity with accounting principles generally accepted in the United States
and in Israel (as applicable to the financial statements of the Company, such
accounting principles are practically identical).

Pursuant to Section 211 of the Companies Ordinance (New Versions)- 1983, we
state that we have obtained all the information and explanations we have
required and that our opinion on the above statements is given according to the
best of our information and the explanations received by us and as shown by the
Company's books.

                                        SHLOMO ZIV & CO.
Tel-Aviv, March 18, 1997                /s/ [ILLEGIBLE]
                                        Certified Public Accountants (Isr.)


                                      134
<PAGE>   136


                  [LETTERHEAD OF COHEN, EYAL, YEHOSHUA & CO.]

                             AMPAL ENTERPRISES LTD.

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

                            SPECIAL PURPOSE STATEMENT

We have audited the balance sheets of Ampal Enterprises Ltd. as at December31,
1996 and 1995, the related statements of profit and loss, the statement of
changes in shareholders' equity and the statement of cash flows for each of the
three years in the period ended December 31, 1996, expressed in New Israeli
Shekels. 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, including those prescribed under the Auditors Regulations (Auditor's
Mode of Performance), 1973. For purposes of these financial statements, there is
no material difference between generally accepted Israeli auditing standards and
auditing standards generally accepted in the U.S. These standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement, whether originating in
an error in the financial statements or misstatement contained 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 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.

The aforementioned financial statements have been prepared on the basis of
historical cost adjusted to reflect changes in the general purchasing power of
the Israel currency in accordance with pronouncements issued by the Institute of
Certified Public Accountants in Israel. Condensed nominal Israeli currency data
on the basis of which the adjusted financial statements were prepared, are
presented in Note 5.

In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 1996 and
1995, the results of its operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996, in
accordance with generally accepted accounting principles. Also, in our opinion,
the financial statements based on nominal data (Note 5) present fairly, in
nominal terms, the financial position of the Company as at December 31, 1996 and
1995, the results of its operations, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996, on the
basis of the historical cost convention.

Pursuant to Section 211 of the Companies Ordinance (New Version) - 1983, we
hereby state that we received all of the information and explanations which we
requested and that our opinion on the financial statements is given based on the
best of the information and explanations which we received and as reflected in
the books of the Company.

                                             /s/ COHEN, EYAL, YEHOSHUA & CO.
                                             Cohen, Eyal, Yehoshua & Co.
                                             Certified Public Accountants (Isr.)

March 10, 1997


                                      135
<PAGE>   137


                        [LETTERHEAD OF FAHN, KANNE & CO.]

                     AUDITORS' REPORT TO THE SHAREHOLDERS OF
                          AMPAL FINANCIAL SERVICES LTD.


We have audited the balance sheets of AMPAL FINANCIAL SERVICES LTD. as of
December 31, 1996 and 1995 and the related statements of income and
shareholders' equity and cash flows for the three years in the period ended
December 31,1996, 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 generally accepted
auditing standards, including those prescribed under the Auditors Regulations
(Auditor's Mode of Performance), 1973 and, accordingly, we have performed such
auditing procedures as we considered necessary in the circumstances. For
purposes of these financial statements, there is no material difference between
generally accepted Israeli auditing standards and auditing standards generally
accepted in the U.S. These standards require that we plan and perform the audit
to obtain reasonable assurance that the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentations. We believe that our audits provide a reasonable basis for our
opinion.

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

Condensed statements in historical values which formed the basis of the adjusted
statements appear in Note 13 to the financial statements.

In our opinion, the above mentioned financial statements present fairly the
financial position of the Company as of December 31,1996 and 1995 and the
results of its operations, the changes in its shareholders' equity and its cash
flows for each of the three years in the period ended December 1996, in
conformity with accounting principles generally accepted in Israel, consistently
applied. Also, in our opinion, the financial statements based on nominal data
(Note 13) present fairly, in conformity with generally accepted accounting
principles, the financial position of the Company as of December 31, 1996 and
1995, the results of its operations, the changes in shareholders' equity and its
cash flows for each of the three years in the period ended December 31, 1996, on
the basis of the historical cost convention.

Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The data
regarding this difference is summarized in Note 13 to the financial statements.


                                             /s/ Fahn, Kanne & Co.
                                             Fahn, Kanne & Co.
                                             Certified Public Accountants (Isr.)

                                      136
<PAGE>   138


                        [LETTERHEAD OF SHLOMO ZIV & CO.]

                     AUDITORS' REPORT TO THE SHAREHOLDERS OF

                            AMPAL HOLDINGS (1991) LTD


We have audited the balance sheet of Ampal Holdings (1991) Ltd. as at December
31, 1996 and 1995, the related statements of income, statements of changes in
shareholders' equity and the statements of cash-flows for each of the three
years, the latest ended December 31, 1996, 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 generally accepted auditing
standards, including those prescribed under the Israeli Auditors Regulations
(Auditor's Mode of Performance), 1973 and accordingly, we have performed such
auditing procedures as we considered necessary in the circumstances. For
purposes of these financial statements there is no material difference between
generally accepted Israeli auditing standards and auditing standards generally
accepted in the U.S. These standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement, either originating within the financial statement
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 presentations. We believe that our
audits provide a reasonable basis for our opinion.

The above statements have been prepared on the basis of the historical cost as
adjusted for the changes in the general purchasing power of the Israel currency,
in accordance with opinions issued by the Institute of Certified Public
Accountants in Israel. Condensed statements in historical values which formed
the basis of the adjusted statements appear in Note 8 to the financial
statements.


                                      137

<PAGE>   139


In our opinion, the above mentioned financial statements present fairly, in
conformity with generally accepted accounting principles, in all material
respects, the financial position of the Company as at December 31, 1996 and
1995, the results of its operations, the changes in the shareholders' equity and
cash-flows for each of the three years, the latest ended December 31, 1996 in
conformity with accounting principles generally accepted in the United States
and in Israel (as applicable to the financial statements of the Company, such
accounting principles are practically identical).

Pursuant to Section 211 of the Companies Ordinance (New Versions) 1983, we state
that we have obtained all the information and explanations we have required and
that our opinion on the above statements is given according to the best of our
information and the explanations received by us and as shown by the Company's
books.

                                        SHLOMO ZIV & CO.                   
Tel-Aviv, March 6, 1997                 /s/ [ILLEGIBLE]                    
                                        Certified Public Accountants (Isr.) 


                                      138
<PAGE>   140

                                                                      Number 480
                                                             tel, March 11, 1999


                        [LETTERHEAD OF FAHN, KANNE & CO.]

                     AUDITORS' REPORT TO THE SHAREHOLDERS OF
                         AMPAL INDUSTRIES (ISRAEL) LTD.

We have audited the balance sheets of AMPAL INDUSTRIES (ISRAEL) LTD. as of
December 31, 1998 and 1997 and the related statements of income, shareholders'
equity and cash flows for the three years in the period ended December 31, 1998,
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 generally accepted
auditing standards, including those prescribed under the Auditors Regulations
(Auditor's Mode of Performance), 1973 and, accordingly, we have performed such
auditing procedures as we considered necessary in the circumstances. For
purposes of these financial statements, there is no material difference between
generally accepted Israeli auditing standards and auditing standards generally
accepted in the U.S. These standards require that we plan and perform the audit
to obtain reasonable assurance that the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentations. We believe that our audits provide a reasonable basis for our
opinion.

The data included in the Company's financial statements relating to the equity
in investee companies and relating to the Company's share in the results of
their operations are based on financial statements which were audited by other
auditors.

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

Condensed statements in historical values which formed the basis of the adjusted
statements appear in Note 19 to the financial statements.

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 of December 31, 1998 and 1997 and the results of its operations, the
changes in its shareholders' equity and its cash flows for each of the three
years in the period ended December 1998, in conformity with accounting
principles generally accepted in Israel, consistently applied. Also, in our
opinion, the financial statements based on nominal data (Note 19) present
fairly, in conformity with generally accepted accounting principles, the
financial position of the Company as of December 31, 1998 and 1997, the results
of its operations, the changes in shareholders' equity and its cash flows, for
each of the three years in the period ended December 31, 1998, on the basis of
the historical cost convention.

Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The data
regarding this difference is summarized in Note 20 to the financial statements.


                                             /s/ Fahn, Kanne & Co.
                                             Fahn, Kanne & Co.
                                             Certified Public Accountants (Isr.)

                                      139
<PAGE>   141


                        [LETTERHEAD OF HAFT & HAFT & CO.
                           INCL. STRAUSS, LAZER & CO.]

                               AMPAL (ISRAEL) LTD.

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

                            SPECIAL PURPOSE STATEMENT


We have audited the accompanying consolidated balance sheets of Ampal (Israel)
Ltd, as of December 31, 1996 and 1995, and the related statements of profit and
loss, changes in shareholders' equity and cash flows for each of the two years
ended on those dates, expressed in New Israeli Shekels. 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, including those prescribed under the Auditors' Regulations (Auditor's
Mode of Performance). - 1973. For purposes of these financial statements, there
is no material difference between generally accepted Israeli auditing standards
and auditing standards generally accepted in the U.S. These standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether originating
in an error in the financial statements or in a misrepresentation 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 the
Board of Directors and the Company's management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

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. Condensed nominal Israeli currency data,
on the basis of which the adjusted financial statements of the Company were
prepared, is presented in Note 25.

We did not audit the financial statements of certain subsidiaries, whose assets
constitute approximately 31% and 32% of consolidated total assets as of December
31, 1996 and 1995, respectively, and whose revenues constitute approximately 48%
and 34% of consolidated total revenues for the years ended on those dates
respectively. Those statements were audited by other auditors whose reports have
been furnished to us and our opinion, insofar as it relates to the amounts
included in respect of the aforementioned subsidiaries, is based solely on the
reports of the other auditors. Also, the financial statements of included
companies which were presented at their book equity, were examined by other
auditors.


                                      140
<PAGE>   142
In our opinion, based on our audits and the reports of the other auditors, the
financial statements present fairly, in all material respects, the financial
position of the Company on a consolidated basis as of December 31, 1996 and
1995 and the results of operations, changes in shareholders' equity and cash
flows of the Company on a consolidated basis for each of the two years ended on
December 31, 1996 and 1995, in accordance with generally accepted accounting
principles in Israel.

Also, in our opinion, the unconsolidated financial statements based on nominal
data (Note 25) present fairly, in nominal terms, the unconsolidated financial
position of the Company as at December 31, 1996 and 1995, and the results of its
operations, the changes in shareholders' equity and its cash flows for each of
the three years in the period ended December 31, 1996, on the basis of the
historical cost convention.

Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The data
regarding the method of translation to U.S. dollars and the above mentioned
differences are summarized in Note 25F to the financial statements.

Pursuant to Section 211 of the Companies Ordinance (New Version) - 1983, we
hereby state that we received all of the information and explanations which we
requested and that our opinion on the financial statements is given based on the
best of the information and explanations which we received and as reflected in
the books of the Company.


                                             /s/ H.H.S.L. Haft & Haft & Co.
                                             H.H.S.L.  Haft & Haft & Co.
                                             Certified Public Accountants (Isr.)

March 10, 1997

                                      141

<PAGE>   143
                   [LETTERHEAD OF COHEN, EYAL, YEHOSHUA & CO.]

                              AMPAL PROPERTIES LTD.

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

                            SPECIAL PURPOSE STATEMENT


We have audited the balance sheets of Ampal Properties Ltd. as at December 31,
1996 and 1995, the related statements of profit and loss, the statement of
changes in shareholders' equity and the statement of cash flows for each of the
two years in the period ended December 31, 1996, expressed in New Israeli
Shekels. 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, including those prescribed under the Auditors Regulations (Auditor's
Mode of Performance), 1973. For purposes of these financial statements, there is
no material difference between generally accepted Israeli auditing standards and
auditing standards generally accepted in the U.S. These standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement, whether originating in
an error in the financial statements or misstatement contained 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 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.

The aforementioned financial statements have been prepared on the basis of
historical cost adjusted to reflect changes in the general purchasing power of
the Israel currency in accordance with pronouncements issued by the Institute of
Certified Public Accountants in Israel. Condensed nominal Israeli currency data
on the basis of which the adjusted financial statements of the Company were
prepared, is presented in Note 8.

The data in the financial statement relating to investment in an unconsolidated
subsidiary and to the Company's share in the losses of included companies,
amounting to N.I.S. 8,194 thousand are based on financial statements audited by
other auditors.

In our opinion, based on our audits and the report of the other auditors, the
financial statements present fairly, in all material respects, the financial
position of the Company at December 31, 1996 and 1995 and the results of its
operations, changes in shareholders' equity and cash flows for each of the two
years in the period ended December 31, 1996, in accordance with generally
accepted accounting principles. Also, in our opinion, the financial statements
based on nominal data (Note 8) present fairly, in nominal terms, the financial
position of the Company as at December 31, 1996 and 1995, the results of its
operations, changes in shareholders' equity, and its cash flows for each of the
three years in the period ended December 31, 1996, on the basis of the
historical cost convention.


                                      142
<PAGE>   144


Without qualifying our opinion, we call attention to the Company's accumulated
losses, which substantially exceed its capital.

Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The data
regarding the method of translation to U.S. dollars and the above mentioned
differences are summarized in Note 8E to the financial statements.

Pursuant to Section 211 of the Companies Ordinance (New Version) - 1983, we
hereby state that we received all of the information and explanations which we
requested and that our opinion on the financial statements is given based on the
best of the information and explanations which we received and as reflected in
the books of the Company. 


                                             /s/ COHEN, EYAL, YEHOSHIA & CO.
                                             Cohen, Eyal, Yehoshia & Co.
                                             Certified Public Accountants (Isr.)

March 10, 1997


                                       143


<PAGE>   145


                    [LETTERHEAD OF DELOITTE TOUCHE TOHMATSU]

                           [BRIGHTMAN ALMAGOR & CO.]


                     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, 1998 and 1997, and the consolidated balance sheets
as of such dates, and the related statements of operations, changes in
shareholders' equity and cash flows - of the Company and on a consolidated basis
- for each of the years then ended. These financial statements are the
responsibility of the Company's Board of Directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audits. Comparative figures in the financial statements for the year ended
December 31, 1996 were audited by other auditors whose report, dated February
10, 1997, expressed an unqualified opinion on those statements.

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

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. Condensed nominal Israeli currency data,
on the basis of which the adjusted financial statements were prepared, is
presented in Note 24.

In our opinion, the financial statements present fairly, in all material
respects, the financial position - of the Company and on a consolidated basis -
as of December 31, 1998 and 1997, and the results of operations, changes in
shareholders' equity and cash flows - of the Company and on a consolidated basis
- for the years then ended in accordance with generally accepted accounting
principles.

Furthermore, in our opinion, the financial statements are prepared in accordance
with the Israeli Securities Regulations (Preparation of Annual Financial
Statements) - 1993. 

The condensed consolidated financial information in U.S. dollars presented in
Note 25 to the financial statements, prepared at the request of an affiliate,
represents a translation of the Company's nominal Israeli currency financial
data in accordance with the basis stated in Note 25A. In our opinion, such
translation into U.S. dollars was properly made in accordance with the basis
stated in Note 25A.


/s/ Brightman Bar-Levav Friedman & Co.
Brightman Bar-Levav Friedman & Co.
Certified Public Accountants

Haifa, February 3, 1999

                                      144


<PAGE>   146


                       [LETTERHEAD OF RONEL STETTNER & CO]

                      [CERTIFIED PUBLIC ACCOUNTANT ISRAEL]


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

                             TO THE SHAREHOLDERS OF

                                 BAY HEART LTD.

We have audited the balance sheets of Bay Heart Ltd. ("the Company") as of
December 31, 1996 and 1995, and the consolidated balance sheets of the Company
and its subsidiary ("the consolidated") as of December 31, 1996 and 1995, and
the related statements of income, statements of changes in shareholders' equity
and statements of cash flows for each of the three years in the period ended
December 31, 1996. 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, including those prescribed under the auditors Regulations (Auditor's
Mode of Performance), 1973 and accordingly, we have performed such auditing
procedures as we considered necessary in the circumstances. For purposes of
these financial statements, there is no material difference between generally
accepted Israeli auditing standards and auditing standards generally accepted in
the U.S. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentations.
We believe that our audits provide a reasonable basis for our opinion.

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

Condensed statements in historical values which formed the basis of the adjusted
statements, appear in Note 23 to the financial statements. These amounts have
been translated into U.S. dollars using the method described in Note 24.

In our opinion, based on our audit, the above mentioned consolidated financial
statements present fairly the financial position consolidated and Company - as
of December 31, 1996 and 1995, 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, 1996, in conformity with accounting principles generally
accepted in Israel, consistently applied.

Also, in our opinion, the condensed - consolidated and the Company's financial
statements based on nominal data as presented in Note 24 present fairly, in
conformity with generally accepted accounting principles, the financial position
of the Company as at December 31, 1996 and 1995, and the results of operations,
changes in shareholder's equity, and its cash flows for each of the three years
in the period ended December 31, 1996, on the basis of the historical cost
convention.


                                      145



<PAGE>   147
                       [LETTERHEAD OF RONEL STETTNER & CO]

                      [CERTIFIED PUBLIC ACCOUNTANT 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 historical
net income (loss) and shareholder's equity to the extent summarized in Note
24(g) to the financial statements.



Haifa, Israel,                              RONEL STETTNER & CO
February 10, 1997                           /s/ Ronel Stettner & Co
                                            Certified Public Accountant (Israel)

                                       146


<PAGE>   148
[ERNST & YOUNG LOGO]


                         REPORT OF INDEPENDENT AUDITORS

                             To the Shareholders of

                 CARMEL CONTAINER SYSTEMS LTD. AND SUBSIDIARIES

     We have audited the accompanying consolidated balance sheets of Carmel
Container Systems Ltd. ("the Company") and its subsidiaries as of December 31,
1997 and 1998, 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, 1998. 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 subsidiaries, which statements reflect total
assets constituting 21% and 20% as of December 31, 1997 and 1998, respectively,
and total revenues constituting 32%, 34% and 32% of the related consolidated
totals for each of the three years in the period ended December 31, 1998. These
financial statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to data included for
these subsidiaries is based solely on the reports of the other auditors.

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

     The aforementioned consolidated financial statements have been prepared on
the basis of the historical cost adjusted to reflect the changes in the general
purchasing power of the Israeli currency, as required by the Statements of the
Institute of Certified Public Accountants in Israel.

     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 Carmel Container
Systems Ltd. and its subsidiaries as of December 31, 1997 and 1998, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles in Israel which differ in certain respects from
those followed in the United States (see Note 22 to the consolidated financial
statements).



                                               /s/ KOST, FORER & GABBAY
                                               ------------------------
Tel-Aviv, Israel                                  KOST, FORER & GABBAY
March 4, 1999                              Certified Public Accountants (Israel)

                                      147


<PAGE>   149


                           [LETTERHEAD OF PORAT & CO.]
                      CERTIFIED PUBLIC ACCOUNTANTS (ISR.)


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

                               TO THE SHAREHOLDERS

                                       OF

                         COUNTRY CLUB KFAR-SABA LIMITED


We have audited the financial statements of Country Club Kfar-Saba Limited
(hereinafter - the Company), as follows:

-    Balance sheets of the Company as at December 31, 1998, December 31, 1997.

-    Statements of income, shareholders equity and cash flow for the company for
     the two years ended December 31, 1998 and December 31, 1997.

These 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, including those prescribed under the Auditors Regulations
(Auditor's, Mode of Performance), 1973 and, accordingly we have performed such
auditing procedures as we considered necessary in the circumstances. For
purposes of these financial statements there is no material difference between
generally accepted Israeli auditing standards and auditing standards generally
accepted in the U.S. These standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

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

Condensed statements in historical values which formed the basis of the adjusted
statements appear in Note 19 to the financial statements. These amounts have
been translated into U.S. dollars using the method described in Note 2G.
 

                                      148

<PAGE>   150


                           [LETTERHEAD OF PORAT & CO.]

                      CERTIFIED PUBLIC ACCOUNTANTS (Isr.)

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

                               TO THE SHAREHOLDERS

                                       OF

                         COUNTRY CLUB KFAR-SABA LIMITED


In our opinion, based on our audit, the above mentioned financial statements
present fairly the financial position of the Company as at December 31, 1998 and
1997, the results of its operations, the changes in shareholders' equity and
cash flows for each of the years in the period ended December 31, 1998, in
conformity with accounting principles generally accepted in Israel, consistently
applied. Also, in our opinion, the financial statements based on nominal data
(Note 19) present fairly, in conformity with generally accepted accounting
principles, the financial position of the Company as at December 31, 1998 and
1997, and the results of its operations, the changes in shareholders' equity
and its cash flows for each of the three years in the period ended December 31,
1998, on the basis of the historical cost convention.

Pursuant to section 211 of the companies ordinance (new version) 1983, we state
that we have obtained all the information and explanations we have required and
that our opinion on the aforementioned financial statements is given to the best
of our information and the explanations received by us and as shown by the books
of the company.

Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of
nominal/historical net income (loss) and shareholders' equity to the extent
summarized in Note 20 to the financial statements.


                                            Porat & Co.
                                            /s/ Porat & Co.
                                            Certified Public Accountants (Isr.)

Ramat Gan, February 18, 1999


                                      149




<PAGE>   151


                       [LETTERHEAD OF FAHN, KANNE & CO.]
                      CERTIFIED PUBLIC ACCOUNTANTS (ISR.)

                INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS
                       OF CORAL WORLD INTERNATIONAL LTD.


We have audited the accompanying consolidated balance sheets of "Coral World
International Ltd." (the "Company") and its subsidiaries as of December 31, 1998
and 1997 and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the two years ended December 31,
1998. These financial statements are the responsibility of the Board of
Directors and the management of the Company. Our responsibility is to express an
opinion of these financial statements based on our audits.

We did not audit the financial statements of certain consolidated subsidiaries
which statements reflect assets and revenues of 79% and 51% in 1998 and 79% and
35% in 1997 of the related consolidated totals. The statements of these
subsidiaries were audited by other auditors whose reports have been furnished to
us and our opinion, insofar as it relates to the amounts included for those
subsidiaries, is based solely on the reports of the other auditors.

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

In our opinion, based on our audits and on the reports of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Coral World International Ltd. and
subsidiaries as of December 31, 1998 and 1997, and the results of operations,
changes in shareholders' equity and cash flows for each of the two years ended
December 31, 1998, in accordance with generally accepted accounting principles.


                                             /s/ Fahn, Kanne & Co. 
                                             Fahn, Kanne & Co.
                                             Certified Public Accountants (Isr.)


Tel-Aviv, Israel, March 4, 1999


                                      150

<PAGE>   152



                      [LETTERHEAD OF ARTHUR ANDERSEN LLP]

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors and Shareholders of
Coral World International Ltd.:

We have audited the accompanying consolidated balance sheets of Coral World
International Ltd. (a Guernsey corporation) and subsidiaries (the "Company") as
of December 31,1996 and 1995, 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, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of certain consolidated subsidiaries, which statements
reflect total assets and total revenues of 47% and 60%, respectively, in 1996,
52% and 49%, respectively, in 1995, and revenues of 40% in 1994, of the related
consolidated totals. Those statements were audited by other auditors whose
reports have been furnished to us and our opinion, insofar as it relates to the
amounts included for those entities, is based solely on the reports of the other
auditors.

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

In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Coral World International Ltd. and subsidiaries as of
December 31,1996 and 1995 and the results of their operations and their cash
flows for each of the three years in the period ended December 31,1996, in
conformity with generally accepted accounting principles.


                                                         /s/ Arthur Andersen LLP

March 26, 1997
New York, New York


                                      151

<PAGE>   153


                    [LETTERHEAD OF DELOITTE TOUCHE TOHMATSU]

                           [BRIGHTMAN ALMAGOR & CO.]


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

                             TO THE SHAREHOLDERS OF

                          EPSILON INVESTMENT HOUSE LTD.

We have audited the Consolidated Balance Sheet of EPSILON INVESTMENT HOUSE LTD.,
(an Israeli corporation) (hereinafter - "the Company") and its subsidiary as at
December 31, 1998 and 1997, and the related Consolidated Statements of Income,
Comprehensive Income and Changes in Shareholders' Equity for each of the 3 years
in the period ended December 31, 1998, translated into U.S. Dollars. These
Financial Statements are the responsibility of the Company's Management. Our
responsibility is to express an opinion on these Financial Statements, based on
our audit.

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

The Statement of Cash Flows for the period has not been included in the
Financial Statements.

In our opinion, the nominal Financial Statements in NIS, which were the base of
the translation of the Financial Statements as referred to above, present
fairly, in all material respects, the financial position of the Company and its
subsidiary, as at December 31, 1998 and 1997, the results of their operations
and the changes in their shareholders' equity, for each of the 3 years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles, which are not substantially different from those followed in the
United States.

Also, in our opinion, the translated amounts in the accompanying Consolidated
Financial Statements translated into U.S. Dollars have been computed on the
basis set forth in Note 2.2 to the Consolidated Financial Statements.


/s/ Brightman, Almagor & Co. 
BRIGHTMAN, ALMAGOR & CO.
Certified Public Accountants

Tel-Aviv, March 24, 1999


                                      152
<PAGE>   154



                          [LETTERHEAD OF PORAT & CO.]

                      CERTIFIED PUBLIC ACCOUNTANTS (Isr.)

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

                      Certified Public Accountants (Isr.)

                                       OF

              HOD HASHARON SPORT CENTER (1992) LIMITED PARTNERSHIP


We have audited the balance sheet of Hod Hasharon Sport Center (1992) Limited
Partnership as at December 31, 1998 and 1997, and the related statements of
income, partners' capital and cash flows for each of the three years in the
period ended December 31, 1998, expressed in New Israel Shekels. These financial
statements are the responsibility of the partnership management.

Our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audits in accordance with generally accepted
auditing standards, including those prescribed under the Auditors' Regulations
(Auditor's Mode of Performance), 1973 and, accordingly we have performed such
auditing procedures as we considered necessary in the circumstances. For
purposes of these financial statements there is no material difference between
generally accepted Israeli auditing standards and auditing standards generally
accepted in the U.S. These standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

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

Condensed statements in historical values which formed the basis of the adjusted
statements appear in Note 19 to the financial statements. These amounts have
been translated into U.S. dollars using the method described in Note 2D.


                                      153
<PAGE>   155



                           [LETTERHEAD OF PORAT & CO.]
                      CERTIFIED PUBLIC ACCOUNTANTS (ISR.)

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

                                       OF

              HOD HASHARON SPORT CENTER (1992) LIMITED PARTNERSHIP


In our opinion, based on our audit the above mentioned financial statements
present fairly the financial position of the partnership as at December 31, 1998
and 1997, the results of its operations, the changes in partners' capital and
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with accounting principles generally accepted in Israel, consistently
applied. Also, in our opinion, the financial statements based on nominal data
(Note 19) present fairly, in conformity with generally accepted accounting
principles, the financial position of the partnership as at December 31, 1998
and 1997, and the results of its operations, the changes in partners' capital
and its cash flows for each of the three years in the period ended December 31,
1998, on the basis of the historical cost convention.

Pursuant to section 211 of the companies ordinance (new version) 1983, we state
that we have obtained all the information and explanations we have required and
that our opinion on the aforementioned financial statements is given to the best
of our information and the explanations received by us and as shown by the books
of the company.


                                             Porat and Co.
                                                                       
                                             /s/ Porat and Co.
                                             Certified Public Accountants (Isr.)


Ramat Gan, March 1,1999


                                      154
<PAGE>   156


                          [LETTERHEAD OF ERNST & YOUNG]

                             [KOST FORER & GABBAY]


                         REPORT OF INDEPENDENT AUDITORS

                             TO THE SHAREHOLDERS OF

                               MIVNAT HOLDING LTD.

     We have audited the accompanying balance sheets of Mivnat Holding Ltd.
("the Company") as of December 31, 1998 and 1997 and its subsidiaries ("the
Consolidated") as of December 31, 1997 and the statements of income, changes in
shareholders' equity and cash flows - the Company and the Consolidated - for
each of the three years in the period ended December 31, 1998. 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 by the Israeli Auditors'
Regulations (Mode of Performance), 1973, which do not differ in any significant
respect from generally accepted auditing standards in the United States. These
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 the Company's board of directors and
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     The aforementioned financial statements have been prepared on the basis of
the historical cost adjusted to reflect the changes in the general purchasing
power of the Israeli currency, as required by the Statements of the Institute of
Certified Public Accountants in Israel.

     A summary of the Company's financial statements in nominal (historical)
Israeli shekels was not presented in these financial statements.

     In our opinion, except for the matter described in the preceding paragraph,
the financial statements referred to above present fairly, in a11 material
respects, the financial position of  the Company  as of December 31, 1998 and
1997 and of the Consolidated as of December 31, 1997 and the related results of
operations, changes in shareholders' equity and cash flows - the Company and the
Consolidated - for each of three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles in Israel. Also, in our
opinion, the consolidated financial statements based on nominal data (Note 26)
present fairly, in all material respects, the consolidated financial position as
of December 31, 1997, and the related consolidated results of operations and
changes in shareholders' equity for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles
in Israel, on the basis of the historical cost convention.

     Accounting principles generally accepted in Israel differ in certain
respects from accounting principles generally accepted in the United States.
Financial statements based on the application of the latter and their
translation into U.S. dollars based on the principles set forth in SFAS 52, are
presented in Note 26 to the financial statements.

     Pursuant to Section 211 of the Companies Ordinance (New Version) 1983, we
hereby state that we have received all the information and explanations which we
have requested and that our opinion on the above financial statements is given
based on the best of the information and explanations which we received and as
reflected in the books of the Company.


                                           /s/ Kost Forer & Gabbay
Tel-Aviv, Israel                           KOST FORER & GABBAY
March 7, 1999                              Certified Public Accountants (Israel)


                                      155


<PAGE>   157


                 [LETTERHEAD OF HAGGAI WALLENSTEIN, DOV & CO.]



                                AUDITORS' REPORT

                             TO THE SHAREHOLDERS OF

                               MORIAH HOTELS LTD.

We have audited the accompanying consolidated balance sheets of Moriah Hotels
Ltd. (an Israeli corporation) (hereinafter - the company) and its subsidiaries
as at December 31, 1998 and 1997, and the related consolidated statements of
income (loss), changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1998, expressed in US dollars.
These financial statements are the responsibility of the board of directors and
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. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
company's board of directors and management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Moriah Hotels Ltd. and its
subsidiaries as at December 31, 1998 and 1997, and the results of their
operations, changes in their shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles in Israel, which differ in certain respects from
those followed in the United States (see note 1 to the consolidated financial
statements).

Also, in our opinion, the translated amounts in the accompanying consolidated
financial statements translated into US dollars have been computed on the basis
set forth in note 1a. to the consolidated financial statements.



                                        /s/ HAGGAI WALLENSTEIN, DOV & CO.
                                        HAGGAI WALLENSTEIN, DOV & CO.
                                        Certified Public Accountants (Isr.)
Ramat-Gan,
 March 14, 1999
                                                        

                                      156

<PAGE>   158


                        [LETTERHEAD OF HAFT & HAFT & CO.
                           INCL. STRAUSS, LAZER & CO.]



                                    NIR LTD.

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

                            SPECIAL PURPOSE STATEMENT


We have audited the accompanying balance sheets of Nir Ltd. as at December 31,
1996 and 1995, the related statements of profit and loss, the statement of
changes in shareholders' equity and the statement of cash flows for each of the
three years in the period ended December 31, 1996, expressed in New Israeli
Shekels. 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, including those prescribed under the Auditors Regulations (Auditor's
Mode of Performance), 1973. For purposes of these financial statements, there is
no material difference between generally accepted Israeli auditing standards and
auditing standards generally accepted in the U.S. These standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement, whether originating in
an error in the financial statements or misstatement contained 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 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.

The aforementioned financial statements have been prepared on the basis of
historical cost adjusted to reflect changes in the general purchasing power of
the Israel currency in accordance with pronouncements issued by the Institute of
Certified Public Accountants in Israel. Condensed nominal Israeli currency data,
on the basis of which the adjusted financial statements were prepared, is
presented in Note 17.

In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 1996 and
1995, the results of its operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996, in
accordance with generally accepted accounting principles.

Also in our opinion, the financial statements based on nominal data (Note 17)
present fairly, in nominal terms, the financial position of the Company as at
December 31, 1996 and 1995, and the results of it operations, the changes in
shareholders' equity, and its cash flows for each of the three years in the
period ended December 31, 1996, on the basis of the historical cost convention.



                                      157

<PAGE>   159




Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The data
regarding the method of translation to U.S. dollars and the abovementioned
differences are summarized in Note 17E to the financial statements.

Pursuant to Section 211 of the Companies Ordinance (New Version) - 1983, we
hereby state that we received all of the information and explanations which we
requested and that our opinion on the financial statements is given based on the
best of the information and explanations which we received and as reflected in
the books of the Company.


                                        /s/ H.H.S.L. HAFT & HAFT & CO.
                                        H.H.S.L. Haft & Haft & Co.
                                        Certified Public Accountants (Isr.)



March 10, 1997



                                      158
<PAGE>   160

                     [LETTERHEAD OF PRICEWATERHOUSECOOPERS]

                            [KESSELMAN & KESSELMAND]


                         REPORT OF INDEPENDENT AUDITORS

TO THE SHAREHOLDERS OF

OPHIR HOLDINGS LTD.


We have audited the financial statements of Ophir Holdings Ltd. (hereafter - the
Company) and the consolidated financial statements of the Company and its
subsidiaries: balance sheets as of December 31, 1998 and 1997 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, 1998. 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
constitute approximately 25% and 22% of total consolidated assets as of December
31, 1998 and 1997, respectively, and whose revenues constitute approximately
21%, 11% and 13%, of total consolidated revenues and gains for the years ended
December 31, 1998, 1997 and 1996, respectively. We did not audit the financial
statements of certain associated companies, the Company's interest in which as
reflected in the balance sheets as of December 31, 1998 and 1997 is adjusted NIS
426,127,000 and adjusted NIS 197,862,000, respectively, and the Company's share
in excess of profits over losses of which is a net amount of adjusted NIS
5,237,000 in 1998, adjusted NIS 8,246,000 in 1997 and adjusted NIS 11,254,000 in
1996. The financial statements of those subsidiaries and associated companies
were audited by other independent auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to amounts included for those
companies, is based solely on the reports of the other independent auditors.

We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed by the Israeli Auditors (Mode of
Performance) Regulations, 1973. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement, either due to error or to intentional
misrepresentation. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the Company's Board of Directors and management, as well as evaluating
the overall financial statement presentation. We believe that our audits and the
reports of the other independent auditors provide a fair basis for our opinion.




                                      159
<PAGE>   161

[2ND PAGE LETTERHEAD OF PRICEWATERHOUSECOOPERS]
 

The aforementioned financial statements have been prepared on the basis of
historical cost adjusted to reflect the changes in the general purchasing power
of Israeli currency, in accordance with pronouncements of the Institute of
Certified Public Accountants in Israel. Condensed nominal Israeli currency data
of the Company, on the basis of which its adjusted financial statements were
prepared, are presented in note 15.

In our opinion, based upon our audits and the reports of the other independent
auditors, the aforementioned financial statements present fairly, in all
material respects, the financial position - of the Company and consolidated - as
of December 31, 1998 and 1997 and the results of operations, changes in
shareholders' equity and cash flows - of the Company and consolidated - for each
of the three years in the period ended December 31, 1998, in conformity with
accounting principles generally accepted in Israel. Also, in our opinion, the
abovementioned financial statements have been prepared in accordance with the
Israeli Securities (Preparation of Annual Financial Statements) Regulations,
1993.

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.

The special condensed consolidated financial statements which are presented in
note 16 have been translated into U.S. dollars for the convenience of one of the
Company's shareholders, in accordance with the principles set forth in Statement
of Financial Accounting Standard No. 52 of the Financial Accounting Standards
Board of the United States. In our opinion, the translation has been properly
made.



                                        /s/ KESSELMAN & KESSELMAN
Tel-Aviv, Israel                            Kesselman & Kesselman
  March 11, 1999                        Certified Public Accountants (Isr.)



                                      160
<PAGE>   162


                         [LETTERHEAD KPMG BRAUDE BAVLY]


                     AUDITORS' REPORT TO THE SHAREHOLDERS OF
                          ORLITE INDUSTRIES (1959) LTD


We have audited the balance sheets of Orlite Industries (1959) Ltd (hereinafter
- the Company) at 31 December 1996 and 1995 and the related statements of
income, shareholder's equity and cash flows for each of the three years ended 31
December 1996, 1995 and 1994, expressed in New Israeli Shekels (hereinafter
NIS). 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, including those prescribed under the Auditors Regulations (Auditors
Mode of Performance), 1973, and, accordingly we have performed such auditing
procedures as we considered necessary in the circumstances. For purposes of
these financial statements there is no material difference between generally
accepted Israeli auditing standards and auditing standards generally accepted in
the US. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement an audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

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

In our opinion, based on our audit, the above mentioned financial statements
present fairly the financial position of the Company at 31 December 1996 and
1995 and the results of its operations, the changes in shareholders' equity and
cash flows for each of the three years ended 31 December 1996, 1995 and 1994, in
conformity with accounting principles generally accepted in Israel, consistently
applied.

Also, in our opinion, based on our audit, the financial statements of the
company, on the basis of historical cost convention, present fairly the
financial position of the Company at 31 December 1996 and 1995 and the results
of its operations, the changes in shareholders' equity for each of the three
years ended 31 December 1996, 1995 and 1994, in conformity with accounting
principles generally accepted in Israel, consistently applied.

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 historical
net income and shareholders' equity to the extent summarized in Note 23 to the
financial statements.

These financial statements have been prepared in accordance with the Securities
Regulations (Preparation of Financial Statements), 1993.


/s/ BRAUDE BAVLY
BRAUDE BAVLY CPA


24 February 1997


                                      161
<PAGE>   163


                        [LETTERHEAD OF KPMG BRAUDE BAVLY]

                                       -1-

                      AUDITORS' REPORT TO THE SHAREHOLDERS

                                       OF

                                  ORTEK LIMITED


We have audited the accompanying balance sheets of Ortek Limited (the "Company")
as at December 31, 1997 and 1996, and the statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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, including standards prescribed by the Auditors (Modes of Operation)
Regulations, 1973, which auditing standards are identical in all material
respects 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, whether due to error in the financial statements or anything
misleading 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 the board of directors and the management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
fair basis for our opinion.

The above financial statements are prepared on the historical cost basis
adjusted for changes in the general purchasing power of the Israeli currency
according to Opinions of the Institute of Certified Public Accountants in
Israel. Condensed nominal data, on the basis of which the adjusted financial
statements were prepared, are presented in Note 24. These amounts have been
translated into U.S. dollars using the method describe in the Note to the
accompanying financial statements in U.S. dollars.

In our opinion, the above financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 1997 and 1996
and the results of operations, the changes in shareholders' equity and the cash
flows for each of the years then ended, in conformity with generally accepted
accounting principles in Israel, which differ in one respect from generally
accepted accounting principles in the United States (see Note 3 to these
financial statements).

Pursuant to Section 211 of the Companies Ordinance (New Version), 1983, we state
that we have obtained all the information and explanations we required and that
our opinion on the above financial statements is given according to the best of
our information and the explanations received by us and as shown by the records
of the Company.


/s/ BRAUDE BAVLY
Braude Bavly 



Tel Aviv, March 1, 1998


                                      162
<PAGE>   164


                        [LETTERHEAD OF SHLOMO ZIV & CO.]

                                AUDITORS' REPORT

                             TO THE SHAREHOLDERS OF

                            PARADISE INDUSTRIES LTD.


We have audited the balance sheets of Paradise Industries Ltd. ("the Company")
as of December 31, 1997 and 1996 and the related statements of operation,
statements of changes in shareholders' equity and the statements of cash flows
for each of the three years, the latest ended December 31, 1997. 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, including those prescribed under 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, 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 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.

The aforementioned financial statements have been prepared on the basis of
historical cost as 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. Condensed statements in historical
values which formed the basis of the adjusted statements appear in Note 26 to
the financial statements.

In our opinion, the abovementioned financial statements present fairly, in
accordance with generally accepted accounting principles, in all material
respects, the financial position of the Company as at December 31, 1997 and 1996
and the results of its operations, the changes in its shareholders' equity and
cash flows for each of the three years, the latest ended December 31, 1997.
Similarly, in our opinion, the abovementioned Financial Statements have been
prepared in accordance with the Israeli Securities Regulations (Preparation of
Annual Financial Statements) 1993.

Without qualifying our aforementioned opinion, we draw your attention to Note
24, regarding a fire which broke out in the Company's factory and the action of
the Company's management in connection with the reconstruction of the factory
and renewal of operations.

                                                                     

                                                 Shlomo Ziv & Co.          
                                                 /s/ 
                                        Certified Public Accountants (Isr.)
                      

Tel-Aviv, February 24, 1998

                                      163
<PAGE>   165

                        [LETTERHEAD OF FAHN, KANNE & CO.]


                                                                     Number: 990


                     AUDITORS' REPORT TO THE SHAREHOLDERS OF
                     RED SEA MARINELAND HOLDING (1973) LTD.
                     ----------------------------------------


We have audited the balance sheet of Red Sea Marineland Holding (1973) Ltd. as
of December 31, 1996. 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, including those prescribed under the Auditors Regulations
(Auditor's Mode of Performance), 1973 and accordingly, we have performed such
auditing procedures as we considered necessary in the circumstances. For
purposes of these financial statements, there is no material difference between
generally accepted Israeli auditing standards and auditing standards generally
accepted in the U.S. These standards require that we plan and perform the audit
to obtain reasonable assurance that the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentations. We believe that our audits provide a reasonable basis for our
opinion.

Information as to the effect of the changes in the general purchasing power of
the Israeli currency on the financial statements in accordance with opinions of
the Institute of Certified Public Accountants in Israel, has not been included
in the above statements.

In our opinion, except for the omission of the information referred to in the
preceding paragraph, the above Balance Sheet present fairly, in conformity with
generally accepted accounting principles, the financial position of the Company
as at December 31, 1996, on the basis of the historical cost convention.

Pursuant to Section 211 of the Companies Ordinance (New Version) - 1983, we
state that we have obtained all the information and explanations we have
required and that our opinion on the above Balance Sheet is given according to
the best of our information and the explanations received by us and as shown by
the books of the Company.



                                             /s/ FAHN, KANNE & CO.
                                                 Fahn, Kanne & Co.         
                                        Certified Public Accountants (Isr.)
                       
Tel Aviv, Israel, March 17, 1997

                                      164

<PAGE>   166

                        [LETTERHEAD OF FAHN, KANNE & CO.]

                                                                     Number: 991


                     AUDITORS' REPORT TO THE SHAREHOLDERS OF
                       RED SEA UNDERWATER OBSERVATORY LTD.
                     ---------------------------------------

We have audited the balance sheet of Red Sea Underwater Observatory Ltd.
(hereinafter: "the Company") and the consolidated balance sheet of the Company
and its subsidiaries as of December 31, 1996, and the related consolidated and
company statements of income, changes in shareholders' equity and cash flows for
the year then ended, 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 generally accepted
auditing standards, including those prescribed under the Auditors Regulations
(Auditor's Mode of Performance), 1973. For purposes of these financial
statements, there is no material difference between generally accepted Israeli
auditing standards and auditing standards generally accepted in the U.S. These
standards require that we plan and perform the audit to obtain reasonable
assurance that the financial statements are free of material misstatement,
whether accidental or intentional. 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 above statements were prepared on the basis of historical cost as adjusted
for changes in the general purchasing power of the Israeli shekel, in accordance
with opinions issued by the Institute of Certified Public Accountants in Israel.

Condensed statements of the Company in historical values, which formed the basis
of the adjusted statements, appear in Note 14 to the financial statements. These
amounts were translated into U.S. dollars using the method described in Note 15.

The financial statements of subsidiaries operating abroad, whose assets
constitute approximately 62% of the total assets contained in the consolidated
balance sheet and whose sales constitute approximately 37% of the total revenues
contained in the consolidated statement of income for the year ended December
31, 1996, were audited by other auditors.

In our opinion, based on our audit and the reports of other auditors, as
mentioned above, the financial statements present fairly the financial position
of the Company and Consolidated as of December 31, 1996, and the results of
operations, changes in shareholders' equity and cash flows for the Company and
Consolidated for the year then ended, in conformity with accounting principles
generally accepted in Israel, consistently applied. Also, in our opinion, the
financial statements based on nominal data (Note 14) present fairly, in
conformity with generally accepted accounting principles, the financial position
of the Company as of December 31, 1996 and the results of its operations for the
year ended December 31, 1996, on the basis of the historical cost convention.

In addition, in our opinion, the condensed financial statements translated into
U.S. Dollars (Note 15) are presented fairly in conformity with S.F.A.S. 52.



                                             /s/ FAHN, KANNE & CO.
                                                 Fahn, Kanne & Co.         
                                        Certified Public Accountants (Isr.)
                       
Tel Aviv, Israel, March 17, 1997

                                      165


<PAGE>   167


                    [LETTERHEAD OF DELOITTE TOUCHE TOHMATSU]

                           [BRIGHTMAN ALMAGOR & CO.]

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

                             TO THE SHAREHOLDERS OF

                         RENAISSANCE INVESTMENT CO. LTD
                         -------------------------------


We have audited the Balance Sheet of RENAISSANCE INVESTMENT CO. LTD., (an
Israeli corporation) (hereinafter - "the Company") as at December 31, 1998 and
1997, and the related Statements of Income, comprehensive income and Changes in
Shareholders' Equity for each of the 3 years in the period ended December 31,
1998, translated into US Dollars. These Financial Statements are the
responsibility of the Company's Management. Our responsibility is to express an
opinion on these Financial Statements, based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
These standards require that we plan and perform the audit to obtain reasonable
assurance whether to 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 Statements presentation. We believe that our
audit provides a reasonable basis for our opinion.

The Statement of Cash Flows for the period has not been included in the
Financial Statements.
 
In our opinion, the nominal Financial Statements in NIS., which were the base of
the translation of the Financial Statements as referred to above, present
fairly, in all material respects, the financial position of the Company, as at
December 31, 1998 and 1997, the results of their operations and the changes in
their shareholders' equity, for each of the 3 years in the period ended December
31, 1998, in conformity with generally accepted accounting principles, which are
not substantially different from the followed in the United States.

Also, in our opinion, the translated amounts in the accompanying Financial
Statements translated into US Dollar have been computed on the basis set forth
in Note 2.2 to the Financial Statements.



/s/ BRIGHTMAN, ALMAGOR & CO.
BRIGHTMAN, ALMAGOR & CO.,
Certified Public Accountants

Tel-Aviv, March 24, 1999
                             
                                      166

<PAGE>   168


                          [LETTERHEAD OF ERNST & YOUNG]

                             [KOST FORER & GABBAY]


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 1998 and 1997,
which were audited by us, and on which we expressed our opinion on February 18,
1999, have been provided to you.

     We have audited the accompanying translated U.S. dollar balance sheets of
the Company as of December 31, 1998 and 1997, and the related translated U.S.
dollar statements of income for each of the three years in the period ended
December 31, 1998. 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, including those prescribed by the Israeli Auditors Regulations (Mode
of Performance)(Israel), 1973, which do not differ in any significant respect
from United States generally accepted auditing standards. 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 by 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, 1998 and their accompanying Notes.

                                      167
<PAGE>   169


                          [LETTERHEAD OF ERNST & YOUNG]

                             [KOST FORER & GABBAY]



     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, 1998 and 1997, and the
related translated U.S. dollar results of its operations for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles in Israel. As applicable to the Company's
financial statements, accounting principles generally excepted in the United
States 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.


                                                     Sincerely,              
                                                         
                                                         
                                             /s/ KOST, FORER and GABBAY
                                               KOST, FORER and GABBAY
                                        Certified Public Accountants (Israel)
Tel-Aviv, Israel                        
February 18, 1999                       

                                      168
<PAGE>   170

                          [LETTERHEAD OF ERNST & YOUNG]

                             [KOST FORER & GABBAY]


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 1998 and 1997,
which were audited by us, and on which we expressed our opinion on February 18,
1999, have been provided to you.

     We have audited the accompanying translated U.S. dollar balance sheets of
the Company as of December 31, 1998 and 1997, and the related translated U.S.
dollar statements of income for each of the three years in the period ended
December 31, 1998. 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, including those prescribed by the Israeli Auditors Regulations (Mode
of Performance)(Israel), 1973, which do not differ in any significant respect
from United States generally accepted auditing standards. 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 in 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 by 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, 1998 and their accompanying Notes.

                                      169

<PAGE>   171


                          [LETTERHEAD OF ERNST & YOUNG]

                             [KOST FORER & GABBAY]



     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, 1998 and 1997, and the
related translated U.S. dollar results of its operations for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles in Israel. As applicable to the Company's
financial statements, accounting principles generally excepted in the United
States 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.


                                                     Sincerely,              
                                                         
                                                         
                                             /s/ KOST, FORER and GABBEY
                                               KOST, FORER and GABBEY
                                        Certified Public Accountants (Israel)
Tel-Aviv, Israel                        
February 18, 1999                       

                                      170


<PAGE>   172

                        [LETTERHEAD OF BDO ALMAGOR & CO.]


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Shareholders of
Teledata Communications Ltd.


We have audited the accompanying consolidated balance sheets of Teledata
Communications Ltd. (the "Company") at December 31, 1996 and 1995 and the
related statements of operations, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. 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 consolidated subsidiary, whose
assets constitute approximately 5% and 2% of the total consolidated assets at
December 31, 1996 and 1995, respectively, and whose total revenues constitute
approximately 11%, 13% and 22% of the consolidated total revenues for the years
ended December 31, 1996, 1995 and 1994, respectively. Those statements were
audited by other accountants whose reports have been furnished to us, and our
opinion expressed herein, insofar as it relates to the amounts included for the
abovementioned subsidiary, is based solely on the reports of such other
auditors.

We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed by the Auditors' (Mode of Performance)
Regulations (Israel), 1973. Such auditing standards 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 management, as
well as evaluating the overall financial statements presentation. We believe
that our audits and the reports of the other auditors provide a reasonable basis
for our opinion.

In our opinion, based on our audit and the reports of other independent auditors
as stated above, the aforementioned consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries at December 31, 1996 and 1995 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with accounting principles
generally accepted in the United States.



/s/ BDO ALMAGOR & CO.

BDO Almagor & Co.
Certified Public Accountants


Ramat-Gan, Israel,
February 16, 1997             

                                      171


<PAGE>   173


                    [LETTERHEAD OF DELOITTE TOUCHE TOHMATSU]

                           [BRIGHTMAN ALMAGOR & CO.]


                                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, 1998 and 1997, and the related
statements of operations and changes in shareholders' deficiency for each of the
three years in the period ended December 31, 1998. 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 U.S.
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.

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. Condensed nominal Israeli currency data,
on the basis of which the adjusted financial statements of the Company were
prepared, is presented in Note 8.

In our opinion, the aforementioned financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1998
and 1997, and the results of its operations and changes in shareholders'
deficiency for each of the three years in the period ended December 31, 1998, in
accordance with generally accepted accounting principles in Israel.

                                      172

<PAGE>   174



Pursuant to Section 211 of the Companies Ordinance (New Version) - 1983, we
hereby state that we received all the information and explanations which we
requested and that our opinion on the financial statements is given based on the
best of the information and explanations which we received and as reflected in
the books of the Company.

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 9 to the
financial statements.




/s/ BRIGHTMAN BAR-LEVAV FRIEDMAN & CO.
Brightman Bar-Levav Friedman & Co.
Certified Public Accountants



Tel Aviv, February 21, 1999



                                      173
<PAGE>   175


                    [LETTERHEAD OF DELOITTE TOUCHE TOHMATSU]

                           [BRIGHTMAN ALMAGOR & CO.]


                                AUDITORS' REPORT
                  TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
                           TRINET VENTURE CAPITAL LTD.


We have audited the accompanying balance sheets of Trinet Venture Capital Ltd.
("the Company") as of December 31, 1998 and 1997, and the related statements of
operations, changes in shareholders' deficiency for and cash flows each of the
three years in the period ended December 31, 1998. 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, 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.

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

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. Condensed nominal Israeli currency data,
on the basis of which the adjusted financial statements of the Company were
prepared, is presented in Note 11.

                                     174

<PAGE>   176


In prior years the Company did not prepare consolidated financial statements to
reflect a subsidiary held by the Company through December 31, 1997. Consolidated
financial statements are required in accordance with Opinion No. 57 of the
Institute of Certified Public Accountants in Israel.

In our opinion, based on our audits and the reports of other auditors, except
for omission of consolidated financial statements through December 31, 1997 as
mentioned in the preceding paragraph, the aforementioned financial statements
present fairly, in all material respects, the financial position of the Company
as of December 31, 1998 and 1997, and the results of operations, changes in
shareholders' deficiency and cash flows for each of the three years in the
period ended December 31, 1998, in accordance with generally accepted accounting
principles in Israel.

Pursuant to Section 211 of the Companies Ordinance (New Version) - 1983, we
hereby state that we received all the information and explanations which we
requested and that our opinion on the financial statements is given based on the
best of the information and explanations which we received and as reflected in
the books of the Company.

The financial information in U.S. dollars and in accordance with generally
accepted accounting principles in the United States is based on nominal
historical amounts in Israeli currency and is presented in Note 12. Such
financial information includes investments valued at $8,117,000 and $10,740,000
as of December 31, 1998 and 1997, respectively (98% and 97% of total assets,
respectively), whose values have been estimated by the Board of Directors and
management in the absence of readily ascertainable market values. We have
reviewed the procedures used by the Board of Directors and management in
arriving at their estimates of value of such investments and have inspected
underlying documentation, and, in the circumstances, we believe the procedures
are reasonable and the documentation appropriate. However, because of the
inherent uncertainty of valuation, those estimated values may differ
significantly from the values that would have been used had a ready market for
the investments existed, and the differences could be material.



/s/ BRIGHTMAN BAR-LEVAV FRIEDMAN & CO.

Brightman Bar-Levav Friedman & Co.
Certified Public Accountants

Tel Aviv, March 10, 1999


                                      175

<PAGE>   177

                      [LETTERHEAD OF KESSELMAN & KESSELMAN]

                               [COOPERS & LYBRAND]

                                AUDITORS' REPORT

To the shareholders of

U.D.S. ULTIMATE DISTRIBUTION SYSTEMS LTD.


We have audited the financial statements of U.D.S. Ultimate Distribution Systems
Ltd. (hereafter - the Company) and the consolidated financial statements of the
Company and its subsidiary balance sheets at December 31, 1996 and 1995 and
statements of loss, change in shareholders' equity and cash flows for each of
the years ended on those dates. These financial statements are the
responsibility of the Company's Board of Directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

Our audits were performed in accordance with generally accepted auditing
standards, including those prescribed by the Israeli Auditors (Mode of
Performance) Regulations, 1973. Those standards require that we plan and perform
the audit to obtain reasonable assurance that the financial statements are free
of material misstatement, whether caused by an error in the financial statements
or by misleading information 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 the Company's Board of Directors and management,
as well as evaluating the overall financial statement presentation. We believe
that our audits provide a fair basis for our opinion.

The aforementioned financial statements have been prepared on the basis of
historical cost adjusted to reflect the changes in the general purchasing power
of Israeli currency, in accordance with Opinions of the Institute of Certified
Public Accountants in Israel. Condensed nominal Israeli currency data, on the
basis of which the adjusted financial statements were prepared, are presented in
note 11.

In our opinion, the aforementioned financial statements present fairly, in all
material respects, the financial position - of the Company and consolidated - at
December 31, 1996 and 1995 and the results of operations, changes in
shareholders' equity and cash flows - of the Company and consolidated - for each
of the years ended on those dates, in conformity with generally accepted
accounting principles In Israel.

                                      176
<PAGE>   178



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 no effect on the determination of
nominal/historical net income and shareholders' equity, see note 12.

The nominal Israeli currency consolidated data which are presented in note 12
have been translated into U.S. dollars for the convenience of one of the
Company's shareholders, in accordance with the principles set forth in Statement
No. 52 of the Financial Accounting Standards Board of the United States. The
translation has been properly made.


Tel-Aviv, Israel                                 /s/ KESSELMAN & KESSELMAN
March 5, 1997

                                      177
<PAGE>   179


                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
30th day of March, 1999.

                                  AMPAL-AMERICAN ISRAEL CORPORATION

                             By:  /s/ Yehoshua Gleitman
                                  --------------------------------------------
                                  Yehoshua Gleitman, Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on March 30, 1999.

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

Michael Arnon                      Director
Benzion Benbassat                  Director
Yaacov Elinav                      Director
Kenneth L. Henderson               Director
Hillel Peled                       Director
Shimon Ravid                       Director
Daniel Steinmetz                   Chairman of the Board
                                    of Directors and Director
Raz Steinmetz                      Director


/s/ Yehoshua Gleitman
--------------------------------------------------               March 30, 1999
   Yehoshua Gleitman, Chief Executive Officer
          (Principal Executive Officer)


/s/ Shlomo Meichor
--------------------------------------------------               March 30, 1999
   Shlomo Meichor, Vice President-Finance and
     Treasurer (Principal Financial Officer)


/s/ Alla Kanter
--------------------------------------------------               March 30, 1999
   Alla Kanter, Vice President-Accounting and
    Controller (Principal Accounting Officer)


                                       178