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, 1997

                                       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:

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

           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  _ _
<PAGE>

      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 23,849,043 (as of March 20, 1998).

      The aggregate market value of the voting stock held by non-affiliates of
the registrant is $38,311,699 (as of March 20, 1998).

================================================================================
<PAGE>

                           ANNUAL REPORT ON FORM 10-K
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                      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 12 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 being of
world-class stature. As a result, the Company invested approximately $8.9
million during 1997 in the high-technology and communications sector. These new
investments, which represent the Company's primary investments in 1997, as well
as the largest investment in the Company's history - the purchase of a one-third
interest in the shared networks operations of Motorola Communications Israel,
Ltd. ("Motorola Israel"), in January, 1998 - represent 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 or will become of 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 divest itself of such
investments. For example, the Company sold its interest in Pri Ha'emek (Canned
and Frozen Food) 88 Ltd., a processor and packager of frozen vegetables, canned
juices and other vegetable and citrus products, in December 1996 and its
interest in Orlite Industries (1959) Ltd., a manufacturer of composite material
products, in May 1997.

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


                                       1
<PAGE>

      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.

<TABLE>
<CAPTION>
                                                                                                PERCENTAGE
                                                                                                  AS OF
        INDUSTRY SEGMENT                                  PRINCIPAL BUSINESS                 DECEMBER 31, 1997
        ----------------                                  ------------------                 -----------------
<S>                                                 <C>                                           <C>
HIGH TECHNOLOGY AND COMMUNICATIONS
  A.T.V. Broadcasting Ltd.----------------------    Arabic Cable Channel                           24.9
  Breeze Wireless Communications Ltd.-----------    Wireless Local Area Network                     8.3
  Clalcom Ltd.----------------------------------    Communications                                  0.7
  Fundtech Ltd.---------------------------------    Banking Software                                2.2
  Mercury Interactive Corporation
   (NASDAQ: "MERQ")-----------------------------    Software Quality Products                       0.4
  M-Systems Flash Disk Pioneers Ltd.
   (NASDAQ: "FLSHF")----------------------------    Data Storage Material                           1.4
  Mutek Solutions Ltd.--------------------------    Develops Software for Servers                   7.2
  NKO, Inc.-------------------------------------    Facsimile Transmission                          3.0
  Ortek Ltd.------------------------------------    Electro-optical Devices                        24.99
  PowerDsine Ltd.-------------------------------    Telecommunications Components                  12.5
  Qronus Interactive Israel (1994) Ltd.---------    Software Quality Products                      10.0
  Shellcase Ltd.--------------------------------    Packaging Process for Computer Chips           11.0
  Shiron Satellite Communications (1996) Ltd.---    Satellite Modems and Fast Internet Access      12.0
  TODD Investments Limited
   (Geotek Communications Ltd.)-----------------    Wireless Telecommunications Systems            15.0(1)
  Trinet Venture Capital Ltd..------------------    Venture Capital Fund                           50.0
     Comfy Interactive Movies Ltd.(TASE)--------    Computer Technology for Children                4.5(2)
     ImageNet, Inc.-----------------------------    Computer Systems, Software and Hardware        21.9(2)
     Logal Software and Educational
      Systems Ltd. (NASDAQ: "LOGLF")------------    Educational Software                            2.9(2)
     Peptor Ltd.--------------------------------    Pharmaceutical Products                         1.0(2)
     Smart-Link Ltd.----------------------------    Multimedia                                     20.3(2)
  U.D.S.-Ultimate Distribution Systems Ltd.-----    Distribution Software                          21.9
  Unic View Ltd.--------------------------------    Projection Television System                   50.
  VisionCare Ophthalmic Technologies Ltd.-------    Advanced Optical Products                       5.1
  XaCCt Technologies Ltd.-----------------------    TCP/IP Network Software                        11.8

REAL ESTATE
  Am-Hal Ltd.-----------------------------------    Senior Citizen Facilities                      50.0
  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
  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
     Clark/67 Associates L.P.-------------------    Commercial Real Estate                         21.3(3)
     Courses Investment in Technology Ltd.------    Venture Capital Fund                            4.6(3)
     Industrial Buildings Corporation
      Ltd. (TASE)-------------------------------    Industrial Real Estate                          5.6(3)
     Mainsoft Corporation-----------------------    Develops Tools for Unix                         1.8(3)
     Memco Software Ltd.(NASDAQ: "MEMCF")-------    Computer Security Software Products             4.9(3)
     Shmey-Bar Group----------------------------    Commercial Real Estate                          7.1(3)
     Teledata Communications Ltd.
      (NASDAQ: "TLDCF")-------------------------    Telecommunications Systems                      1.2(3)
  Shikun U'Fituach le-Israel Ltd.---------------    Real Estate                                     0.7(4)

ENERGY DISTRIBUTION
  Granite Hacarmel Investments Ltd. (TASE-------    Distribution of Refined Petroleum Products     21.5

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

FINANCE AND OTHER HOLDINGS
  Epsilon Investment House Ltd.-----------------    Investment House                               20.0
  Renaissance Israel----------------------------    Investment Fund                                15.0

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)   The Company's ownership of Geotek Communications Ltd. is through TODD
      Investments Limited, of which the Company directly owns 15%.

(2)   As of December 31, 1997, Trinet Venture Capital Ltd., held the following
      percentage interests:

         Comfy Interactive Movies Ltd.---------------      4.6%
         ImageNet, Inc.------------------------------      39.4%
         Logal Software and Educational Systems Ltd.-      5.7%
         Peptor Ltd.---------------------------------      2%
         Smart-Link Ltd.-----------------------------      40.6%

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

(3)   As of December 31, 1997, Ophir Holdings Ltd. held the following percentage
      interests:

         Clark/67 Associates L.P.--------------------      50%
         Courses Investment in Technology Ltd.-------      5%
         Industrial Buildings Corporation Ltd.-------      13.3%
         Mainsoft Corporation------------------------      4.3%
         Memco Software Ltd.-------------------------      11.6%
         Shmey-Bar (I.A.) 1993 Ltd.,
          Shmey-Bar (T.H.) 1993 Ltd. and
          Shmey-Bar Real Estate 1993 Ltd.------------      16.7%
         Teledata Communications Ltd.----------------      2.7%

      Ophir sold its interest in Clark, effective February 20, 1998.

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

(4)   As of February 1998, the Company no longer has an interest in Shikun
      U'Fituach le-Israel. See "Renaissance Israel."

SIGNIFICANT RECENT DEVELOPMENTS SINCE BEGINNING OF LAST FISCAL YEAR

      Formation Of A New Communications Service Provider In Israel

      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 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 Agreement, as amended, is referred to as the
"Purchase Agreement." In addition to the purchase price, Communications paid
Motorola Israel $279,904 for interest on the purchase price that accrued between
the date of the Purchase Agreement and the closing of the transaction.

      The payment for the purchase price was obtained from Ampal's own resources
as well as from two short-term bridge 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"), the holder of approximately 23% of Ampal's Class A Stock, $1.00
par value (the "Class A Stock") on a fully-diluted basis (as of December 31,
1997). Each loan has a term of 90 days and bears interest at a rate of LIBOR
plus 0.5%. Ampal anticipates obtaining long-term bank financing.

      Pursuant to the terms of the Purchase Agreement, a new wireless
communications service provider (the "Provider" or the "Corporation"), which
will be owned one-third by Communications and two-


                                       2
<PAGE>

thirds by Motorola Israel, will coordinate and operate the digital and analog
public-shared two-way cellular radio and other services in Israel previously
furnished by Motorola Israel. The digital wireless communications services are
based on the iDENTM integrated wireless communication technology, which is known
as MIRS in Israel. Multi-functional iDEN technology allows rapid communication
for people in workgroups by enabling four services in a single handset: high
quality mobile telephone, two-way radio, text messaging and data capabilities.
iDEN systems have been deployed in the United States, Canada, Japan and Israel.

      Communications and Motorola Israel entered into a shareholders' agreement
which governs the relationship between the shareholders of the Corporation (the
"Shareholders' Agreement"). Communications owns all of the authorized preferred
shares of the Corporation and Motorola Israel owns all of the authorized
ordinary shares. Each share issued by the Corporation is entitled to one vote.
Under certain circumstances, the preferred shares will be converted to ordinary
shares.

      To the extent of available after-tax profits, the Provider is required to
pay distributions or dividends to Communications 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 the Provider will not be impaired. The Shareholders'
Agreement contains provisions whereby the Provider shall endeavor to pay
distributions or 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 the Provider shall share on a pro rata basis. To the extent
that any of the above distributions or dividends are not paid by the Provider,
they will accumulate. Pursuant to the Articles of Association of the
Corporation, no dividends will be paid by the Corporation to Motorola Israel
until Communications has received all of its accumulated dividends. Any
distributions or dividends which are paid in excess of the above amounts for a
given fiscal year will similarly be paid pro rata to Communications and Motorola
Israel based on their shares in the Provider.

      Pursuant to the Purchase Agreement, Motorola Israel guaranteed that
Communications would receive from the Provider 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 Communications to repay such guarantee payments in
amount equal to the excess over $7,500,000 actually received by Communications
from the Provider with respect to any subsequent year.

      Motorola Israel has agreed to make certain payments to Communications 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 the Provider and the total proceeds to the
partners or shareholders of the Provider is less than $450 million.

      Certain actions will require the approval of 75% of the interests in the
Provider, including (a) the sale of an interest in the Provider, (b) a material
change in the business of the Provider which is not in the ordinary course, (c)
the merger, reorganization, consolidation or sale or other disposition of all or
a substantial part of the Provider's assets, (d) the liquidation or filing of a
petition for bankruptcy of the Provider, (e) the declaration and payment of
certain dividends and distributions, and (f) the issuance of a request to
shareholders for additional funding.


                                       3
<PAGE>

      The Provider will be governed by a Board of Directors consisting of up to
six members, with each member entitled to cast one vote. Each holder of a 15% or
greater interest in the Provider will be entitled to appoint one member of the
Provider's Board of Directors for each 15% share held. Initially, the Provider's
Board of Directors has six members, two of whom will be appointed by
Communications and the other four of whom (including the Chairman of the Board)
will be appointed by Motorola Israel.

      Communications and Motorola Israel agreed to the initial senior management
team of the Provider. In the future, so long as Motorola Israel owns at least a
40% interest in the Provider, it will have the right to nominate candidates for
General Manager and, so long as Communications owns at least a 15% interest in
the Provider, Communications will be entitled to nominate the candidates for
Financial Manager. The actual appointment of any such candidates will require
the approval of five out of the six directors of the Provider.

      The Shareholders' Agreement contains restrictions on transfers of
interests. Transfer by a shareholder of all or any part of its interest in the
Provider to a third party is subject to the other shareholder's right of first
refusal. Any transfer of an interest in the Provider, the consideration for
which is not wholly in cash, must be approved by the holders of at least 75% of
the interests in the Provider.

      The Shareholders' Agreement also provides that for a two-year period
commencing on the date that the partnership transferred its assets to the
Corporation, no shareholder will be permitted to transfer its shares if, as a
result of such transfer, the combined ownership of Communications and Motorola
Israel would be less than 90% of the outstanding capital stock of the
Corporation. Of the 10% interest the parties might be permitted to transfer
during the two-year period, Ampal would be permitted to transfer 8% and Motorola
Israel 2%. Furthermore, in the event that Motorola Israel desires to transfer
some or all of its shares to a third party, as long as Communications owns no
more than a 50% interest in the Corporation, Communications will have the right
to transfer the same proportion of its shares to such third party on the same
terms as Motorola Israel transfers its shares. Under certain circumstances,
Motorola Israel may require Communications to sell its shares to a third party
in connection with a sale by Motorola Israel of its shares to such third party.

      Communications has agreed that as long as Motorola Israel has the largest
interest in the Provider, the Provider will, pursuant to a supply and
maintenance agreement, utilize exclusively subscriber equipment and
infrastructure equipment manufactured or supplied by Motorola Israel and utilize
Motorola Israel's purchasing services so long as the prices for such equipment
do not exceed agreed-upon amounts. Furthermore, for a period of three years from
the formation of the Provider, Motorola Israel will, pursuant to an
administrative agreement, supply the Provider certain administrative services.
The Provider has the right to terminate in whole or in part such administrative
agreement if the prices for such services are not competitive. Ampal has
considered the terms of such supply and maintenance agreement and administrative
agreement and has determined that both such agreements are in the best interests
of the Provider and Communications.

      The $110 million purchase price for Communications' one-third interest in
the Provider was based upon Ampal's current valuation of the SNO and its
prospects. The Purchase Agreement provides that under specified circumstances
indicating that there has been an increase in the enterprise value of the
Corporation, Communications must pay Motorola Israel an additional amount (the
"Bonus"). The formula for the Bonus varies depending upon whether an initial
public offering of the Corporation's shares (an "IPO") has been consummated. If
an IPO is consummated prior to December 31, 2002, Communications must pay
Motorola Israel a Bonus based on an increase in the valuation of the Corporation
for purposes of the IPO. In no event will such Bonus payment 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.


                                       4
<PAGE>

      If an IPO is not consummated prior to December 31, 2002 and if all
dividends accumulated with respect to Communications' preferred shares up to
that time have been paid, then Communications must pay Motorola Israel a Bonus
if (A) the then present value of the actual after tax net income of the
Corporation (as reported by the Corporation's 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 the Corporation 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.

      In March 1998, Communications transferred its interest in the Provider 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, 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).

      The related parties purchased their limited 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 will assume
their pro rata share of Ampal's long term financing. A portion of the $350,000
cash payment made by Dr. Gleitman's entity 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. It is
intended that the loans to Dr. Gleitman will mirror the terms of the long-term
financing that Ampal anticipates obtaining. Should the long-term financing terms
differ from what Ampal currently anticipates, the terms of Dr. Gleitman's loans
will be adjusted accordingly.

      Since the Partnership was formed prior to the formation of the
Corporation, the restrictions on transfer discussed above do not apply to the
purchase of limited interests in the Partnership. Furthermore, pursuant to an
agreement among all the partners of the Partnership, for two years only the
General Partner will be able to transfer a portion of its interest.

      The Partnership is entitled to all of Communications' rights under the
Purchase Agreement and has assumed all of its obligations.

HIGH TECHNOLOGY AND COMMUNICATIONS

      A.T.V. Broadcasting Ltd. ("A.T.V.")

      On February 25, 1997, the Company acquired a 24.9% interest in A.T.V. Roll
Communications Ltd., a prominent Israeli media company, also has a 10% equity
interest in A.T.V. A.T.V. is expected to submit a bid to the Israeli Ministry of
Communications ("MOC") for the establishment and operation of a new cable
channel targeted at the Arabic-speaking population of Israel. As of the date
hereof, the MOC has not yet published the tender offer. The Company originally
invested $37,000 in A.T.V. Pursuant to the shareholders' agreement, should
A.T.V. be selected by the MOC to manage and operate the cable channel, the
Company will be required to invest an additional $197,000 and to make available
$406,000 as a loan. The Company may also be required to provide additional
financing.

      It is anticipated that the cable channel may be carried by regional cable
companies and that its signal may be made available to the entire population of
the Middle East via satellite. Furthermore, for the first time, an Israeli cable
channel will be licensed to sell advertising time.

      Breeze Wireless Communications 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 8.5% in 1996 and 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, 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 sales and provides support to customers
on the American continent.

      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 1.6% (before the
underwriters exercised their over-allotment options on March 31, 1998). Ampal
received $307,000 for the shares it sold in the offering.

      Idan Software Industries I.S.I. Ltd. ("Idan")

      The Company owned 7.9% of Idan, which it purchased in 1993. On March 27,
1997, the


                                       5
<PAGE>

Company sold its interest in Idan to Idan's principal shareholder for $945,000.
The Company recorded a gain of $143,000 with respect to this transaction in the
first quarter of 1997.

      ImageNet, Inc. ("Imagenet")

      The Company has a 21.9% equity interest in ImageNet. The Company purchased
its direct holding of 2.2% in April, 1997 for $340,000. (The rest of the
Company's interest is through Trinet Venture Capital Fund.) ImageNet 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. ImageNet'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.

      Medco Electronics Systems Ltd. ("Medco")

      In February 1998, the Company purchased a 15.4% interest in Medco for
$500,000. Medco is developing a special device used to detect cardiac problems
in fetuses.

      Memco Software Ltd. ("Memco")

      The Company owns a 4.9% 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. See "Ophir Holdings Ltd." for a more complete
description of Memco.

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

      M-Systems Flash Disk Pioneers Ltd. ("M-Systems")

      In January 1995, the Company acquired 260,416 common shares of M-Systems,
equal to a 4.1% interest, for $1 million and received warrants to purchase an
additional 130,206 common shares at $4.61 per share until June 30, 1998.
M-Systems is an Israeli company that designs, develops, manufactures and markets
innovative software and hardware data storage solutions. During 1997, the
Company sold 66,000 common shares of M-Systems for a net gain of $.1 million
after taxes. As a result of the Company's sales of shares of M-Systems in 1996
and 1997 and the issuance of new shares by M-Systems, the Companys interest
decreased to 1.4% as of December 31, 1997.

      M-Systems' shares are listed on NASDAQ under the symbol "FLSHF."

      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.


                                       6
<PAGE>

      The Company has agreed to invest approximately $700,000 in Mutek in order
to maintain its current initial percentage when Mutek undergoes additional
financing in the second quarter of 1998.

      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. See "Renaissance Israel" for a more complete
description of Clalcom.

      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.

      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.

      Qronus Interactive Israel (1994) Ltd. ("Qronus")

      In 1994, Qronus was established to develop and sell automated software
testing tools for real-time embedded systems, which are typically custom-built
computer systems built for a specific control need. 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.

      The Company, as of December 31, 1997, owned a 10.0% interest in Qronus. In
the first quarter of 1998, the Company invested an additional $325,000 in Qronus
and increased its interest to 13.0%.

      Shellcase Ltd. ("Shellcase")

      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 in developing a two-way fast internet
access via satellite systems.

      Teledata Communications Ltd. ("Teledata")

      Teledata designs, develops, manufactures, markets and supports advanced
wireline and wireless customer access network equipment for telephone operating
companies worldwide. Its products enable telephone operating companies to
enhance the capacity, reach and functionality of the network of transmission
links that connects subscribers to a local exchange, generally known as the
"local loop" or "customer access network." Using Teledata's products, telephone
operating companies can quickly and cost-effectively deploy new networks using
fiber, copper or radio links and upgrade the existing infrastructure in


                                       7
<PAGE>

order to substantially increase the number of subscribers that can be served and
improve the scope and quality of services offered. Teledata supplies advanced
access systems to major telecom operators in Europe, South and Central America,
Asia, Africa and the Pacific Rim.

      During 1997, Ophir sold 860,000 shares of Teledata as part of a Teledata
public offering. Ophir sold an additional 542,000 shares of Teledata at prices
ranging from $19.125 per share to $45.625 per share. As of December 31, 1997,
Ophir owned 342,347 shares of Teledata. As a result of the sales by Ophir, Ampal
recorded income in 1997 in the amount of approximately $12.3 million ($8 million
net of taxes) Additionally, during 1997, the Company directly sold 119,800
shares of Teledata at prices ranging from $23.50 per share to $33.50 per share.
As a result of its direct sales, the Company recorded net income, in 1997 in the
amount of approximately $2.9 million ($1.9 million net of taxes.) As of July 29,
1997, the Company no longer had any direct holding in Teledeta.

      Teledata's shares are quoted on the NASDAQ NM under the symbol "TLDCF."

      Trinet Venture Capital Ltd. ("Trinet")

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

      In 1995, Trinet invested $900,000 for a 51% interest in Smart-Link Link
Ltd. ("Smart-Link"), 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. Trinet's current
equity interest in Smart-Link is 40.6%. As a result of Trinet's unrealized loss,
the Company recorded a $.2 million net loss after taxes in 1997.

      In December 1996 and January 1997, Trinet invested an aggregate amount of
$1 million for a 62.2% interest in Nulan Technologies Ltd., a developer,
producer and marketer of communications and multimedia products. As a result of
Trinet's unrealized loss, the Company recorded a $.3 million net loss after
taxes in 1997.

      Trinet also has a 4.6% interest in Comfy Interactive Movies Ltd., a
developer and marketer of computer technology for children; a 5.7% interest in
Logal Software and Educational Systems Ltd., a developer and marketer of
computer-integrated educational systems for scientific instruction in
educational systems; a 39.4% interest in ImageNet, a developer of activities
related to computer systems, software and hardware; and a 2% interest in Peptor
Ltd., a developer of advanced pharmaceutical products based on synthetic
peptide.

      In the first quarter of 1998, the Chief Executive Officer of Trinet
resigned and Trinet's holdings are currently being managed by Ophir. See "Ophir
Holdings Ltd."

      U.D.S.-Ultimate Distribution Systems Ltd. ("U.D.S.")

      In September 1995, the Company invested $1.3 million to acquire a 21.9%
equity interest in U.D.S. and three-year options to acquire an additional 4.4%
equity interest.

      U.D.S., formerly known as Barshar Ltd., is an Israeli-based software
company specializing in the management and optimization of a variety of logistic
tasks for the distribution industry. Its products allow savings in the cost of
distribution and increased management control over routing of products and
people. Its software has been adopted by major food and beverage distributors
including Coca-Cola and CPC Israel. Recent users in the United States include
Anheuser-Busch, Miller, Coors and Pepsi.

      Because of uncertainty with respect to U.D.S.'s future operations, the
Company has written-down its carrying value in U.D.S. to zero.

      Unic View Ltd. ("Unic View")


                                       8
<PAGE>

      In March 1997, the Company invested $1 million to acquire a 7.3% interest
in Unic View. 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.

      XaCCt Technologies Ltd. ("XaCCt")

      Ampal's original investment in XaCCt, made in June 1997, was $400,000 for
an 11.8% interest. On March 2, 1998, Ampal invested an additional $838,000 for a
total equity interest of 19.1%. XaCCt is developing billing, auditing and
accounting software for TCP/IP networks. This software will allow such networks
to generate reports of networks transactions and services by treating them
exactly like telephone calls.

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.

      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 160
were occupied on December 31, 1997), 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 towards the end of 1999.

      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 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


                                       9
<PAGE>

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. One claim in the
amount of 3.6 million New Israeli Shekels ("NIS" or "shekels") (approximately
$805,970) has 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. The Company expects to
continue to vigorously defend the claim.

      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 1997. 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 1997. 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 1997. Both of these properties are net leased to Hapoalim. For a
discussion of Israeli real estate tax considerations that may be applicable to
certain real property leases of the Holding Companies, see "Certain United
States and Israeli Regulatory Matters-Certain Israeli Real Estate Tax Matters."

      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 $29.2 million of these debentures were outstanding
as of December 31, 1997. Ampal Development has deposited with Hapoalim funds
sufficient to pay all principal and interest on these debentures.

      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 1997, it received approximately $108,000 in rent
for this property.

      Ampal (Israel) Ltd. ("Ampal (Israel)")

      Ampal (Israel), a wholly-owned subsidiary of Ampal, owns an approximately
57,000 square feet 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


                                       10
<PAGE>

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 January 6, 1998, the maturity date for the repayment of the $15
million of outstanding principal was extended to February 28, 1999, the interest
rate was set at LIBOR plus .75% and Ampal agreed to guarantee all outstanding
obligations.

      Currently, 79% of the space owned by Ampal Realty in the building is
occupied.

      Pursuant to an agreement dated June 19, 1997, Ampal (Israel) purchased the
6% interest in Ampal Realty previously held by an unrelated third party.
Pursuant to the same agreement, Ampal repaid all financing provided to Ampal
Realty by this third party.

      During 1997, Ampal Realty recorded approximately $3.6 million in rent.

      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 feet of storage and other space expiring in 2001. As
of December 31, 1997, 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.

      Bay Heart owns a 50% interest in 90,000 square feet of land adjacent to
the Mall. The remaining 50% interest is held by an unrelated group of investors
with whom Bay Heart entered into a joint venture agreement. Bay Heart also owns
30,000 square feet of land adjacent to the Mall. These plots of land are
intended to be used for the construction of an addition to the Mall.

      Bay Heart is a party to a Letter of Intent with both the Ports and
Railways Authority and a subsidiary of the Egged bus company regarding the
establishment of a joint company, in which each will be equal investors, for the
construction of a transportation and business complex next to the Mall. This
project will include the construction of both a bus terminal and train station.
The land for this project is owned by the Ports and Railways Authority which,
pending proper regulatory approval, is expected to make it available to the
joint company.

      See "Certain United States and Israeli Regulatory Matters-Certain Israeli
Real Estate Tax Matters" for a discussion of Israeli real estate tax
considerations that may be applicable to certain real property leases of Bay
Heart.

      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 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 nominal. Ampal is contesting this legal proceeding. Though a
hearing has been held, no judgment in this case has been rendered as of the date
hereof. 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 coordinates the work of
contractors, planners and suppliers of various engineering


                                       11
<PAGE>

services.

      Industrial Buildings owns approximately 13.2 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 2,437 lessees under net leases having terms of up to ten years.
See "Conditions in Israel-Certain Israeli Real Estate Tax Matters" for a
discussion of Israeli real estate tax considerations that may be applicable to
certain real property leases of Industrial Buildings. The occupancy rate in
buildings owned or leased by Industrial Buildings was approximately 86.5% at
December 31, 1997.

      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 6% 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
1997, Industrial Buildings distributed a dividend of approximately NIS 60
million ($16.7 million).

      Ophir's interest in Industrial Buildings are 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, 1997.

      The Company's interest in Industrial Buildings, as of December 31, 1997,
was 5.6%.

      Ophir Holdings Ltd. ("Ophir")

      Ophir is a holding and investment company that holds interests in high
technology and real estate companies. In addition, Ophir has invested in two
mutual funds and seven start-up companies in the fields of biotechnology,
software and medical equipment. During 1997, Ophir invested $2.9 million in
start-up companies and wrote-down $1.6 million as research and development.
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. For a discussion
of Israeli real estate tax considerations that may be applicable to certain real
property leases of Ophir, see "Certain United States and Israeli Regulatory
Matters-Certain Israeli Real Estate Tax Matters."

      The Company and ICH, 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.

      Ophir has developed approximately 60,000 square feet of office and
commercial space and approximately 59,000 square feet of parking space on
property owned by it in Petach Tikva, Israel. On December 11, 1996, Ophir
entered into an agreement to sell this space and property for $11.5 million,
with a net profit of $2.6 million (which was recognized in the first quarter of
1997).


                                       12
<PAGE>

      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 $16.5 million. Ophir's share of
the property and joint venture is 70%.

      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 $.6
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.

      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 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, which will take place upon the completion of the building, is
expected to take 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 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.

      During 1997, Ophir sold 1,402,000 Teledata Ordinary Shares (including
860,000 Ordinary Shares as part of Teledata's public offering) for $41.1 million
dollars. Ophir's net gain on sale of these Ordinary Shares was approximately $29
million, net of taxes. Ophir reduced its interest to Teledata to 342,347
Ordinary Shares or 2.7%. Because it sold a substantial number of Teledata
Ordinary Shares in 1997, Ophir no longer records its investment in Teledata by
the equity method of accounting. The carrying value of its interest is now
recorded at fair market value. As a result, Ophir recorded an unrealized net
gain of $2.2 million in 1997. In addition, Ophir had an unrealized net gain of
$1.9 million in conjunction with Teledata's public offering. For information
regarding Ophir's interest in Teledata, see "Teledata


                                       13
<PAGE>

Communications Ltd."

      In February 1998, Dr. Gleitman, Chief Executive Officer of Ampal, became
Chairman of 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 1997, Sonol had a net gain of 16 public gas stations to its
network. As of December 31, 1997, Sonol supplied petroleum products to 173
public gas stations in Israel, of which 134 are owned by or leased to Sonol.
Sonol sold approximately 2.1 million metric tons of refined petroleum products
and lubricating oils in 1997.

      Pursuant to the recommendation of a committee appointed by the Minister of
Energy and Infrastructure, the Minister announced his intention to change the
policy which required petroleum companies to hold emergency stocks of crude oil
and refined products and to separate them from the operating inventories of the
oil companies. For the period which commenced November 1996 and ended February
1997, the requirement to hold emergency stocks of heavy fuel oil was gradually
reduced. Also, the government intends to separate the storage of refined
products included in the emergency stocks from the storage of inventories used
in current operations, and in the future, to have tender offers to determine the
party who will hold the emergency stocks in storage facilities specially
designated by the government. In the first quarter of 1998, the Minister of
National Infrastructure published a tender offer for storage of a part of the
crude oil emergency stocks, which are today held by the major oil companies,
including Sonal.

      In accordance with the government ordinance issued by the Minister of the
Finance and the Minister of National Infrastructures regarding the supplying of
aviation kerosene (hereinafter "ATK") to the airline companies at Ben-Gurion
Airport, as of September 1, 1996, Aviations Services Ltd., an affiliate of
Granite, (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 will, 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 50% owned
subsidiary, 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.

      On September 1, 1995, the Israeli government published a decree, the
purpose of which is to regulate infrastructure rates in the fuel economy. The
decree establishes, among other things, the various types of infrastructure
services and the maximum prices allowed, as well as the method for updating the
prices.

      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 Controller of
Restrictive Trade Practices 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 will be carried
out up to the end of March 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 is currently before the Knesset.


                                       14
<PAGE>

      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
comments.

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

      The Company's ownership of Granite, as of December 31, 1997, was 21.5%.
The Company was party to an agreement with the other shareholders of Granite
which expired on February 8, 1998 and which entitled the Company to appoint
three of the eleven members of Granite's board. The Company and these
shareholders, who currently own an aggregate of 85.3% of Granite, had also
agreed to certain restrictions on transfer and to vote together at general
meetings of Granite's shareholders. The parties to the Shareholders' Agreement
have continued to act as if the agreement did not expire and anticipate
entering into a new agreement. If the Company ceases to exercise "significant
influence" over Granite, under applicable accounting principles (which the
Company believes it continues to exercise by virtue of its ownership interest
and board representation) the Company would no longer be permitted to account
for its holdings in Granite under the equity method of accounting, and the
Company's reported earnings could be adversely affected.

HOTELS AND LEISURE-TIME

      Coral World International Limited ("Coral World")

      Coral World, which is 50%-owned by the Company, owns or controls marine
parks in Eilat (Israel) and Perth and Manly (Australia). Coral World's marine
park, located in Eilat is next to coral reefs and visitors at this park view
marine life in its natural coral habitat through large underwater windows. Coral
World's marine parks in Perth and Manly, Australia and Maui, Hawaii 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 and its affiliated companies employed approximately
150 persons as of December 31, 1997.

      In 1997, Coral World's parks had a total of approximately 936,000
visitors. In September 1995, Coral World's formerly owned marine park in St.
Thomas (U.S. Virgin Islands) was damaged by two hurricanes and was closed. Under
an insurance policy, $1.1 million was recovered. Coral World is in a dispute
with another insurance company and its agent with respect to its claim for up to
$1.2 million of additional coverage. It is too early to determine the outcome of
this dispute. In May 1996, Coral World's management made a decision to sell its
marine park in St. Thomas, and Coral World 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. The actual sale of
the marine park in St. Thomas was made on April 11, 1997 for a purchase price of
$.8 million. As a condition to the sale, Coral World retained a 97% interest in
the insurance claim.

      On September 27, 1996, a wholly owned subsidiary of Coral World sold its
marine park in Nassau (Bahamas) to an unrelated party for $3.75 million and
Coral World recorded a loss on sale of approximately $5 million (the Company's
share is $2.5 million, $1.7 million net of taxes).

      In March 1998, a new marine park, Maui Ocean Center, was opened by Coral
World in Maui, Hawaii. This facility, which features an extensive exhibit
related to whales with a sophisticated package of interactive displays, is the
largest of Coral World's parks. It was constructed at a cost of approximately
$20 million (including land acquisition) and was financed, in part, under a $9
million line of credit from Bank Hapoalim.

      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
1,900


                                       15
<PAGE>

member families for each of the 1996/97 and 1997/98 seasons. The construction
cost of the Club was $5.2 million, which was financed 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, had approximately 1,450 member families for the
1997/98 season compared with 1,560 member families for the 1996/97 season. 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:

                                                      NO. OF   MORIAH'S
LOCATION                                CATEGORY      ROOMS    INTEREST
--------                                --------      -----    --------

Jerusalem.............................. Luxury           292   Owns
Eilat.................................. Luxury           306   Owns
Dead Sea............................... Luxury           220   Owns
Tel Aviv............................... Luxury           355   Lease(1)
Tiberias............................... Luxury           265   Leases(2)
Dead Sea............................... First Class      196   Manages(3)
Zichron Yaakov......................... Economy          112   Manages(3)
Nazareth............................... Economy          120   Manages(3)
                                                     -------
Total..................................                1,866
                                                     -------

----------

(1)   Net lease which expires in 2006.

(2)   Net lease which expires in 2001.

(3)   Management agreement which expires in 2004.

      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 1997, Moriah spent approximately $3
million on general improvements and renovations.

      Tourist arrivals in Israel during 1997 and 1996 were 2.1 million and 2.2
million, respectively. Moriah's occupancy rate was 67% (68%, exclusive of the
economy hotels) in 1997 and 63% (65%, exclusive of the economy hotels) in 1996.
The increased occupancy rate from 1996 to 1997 was primarily due to the closure
of the Moriah hotel in Tel Aviv during a part of 1996. The average occupancy
rate in the Israeli hotel industry during 1997 was 64%. Moriah's average room
rate (expressed in dollars) increased by 3.7% in 1997 compared to 1996.

      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>

      Moriah employed approximately 1,520 persons as of December 31, 1997.

      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.

FINANCE AND OTHER HOLDINGS

      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 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 $50,000, reducing its outstanding commitment to approximately


                                       17
<PAGE>

$150,000. The Company is entitled to certain potential co-investment
opportunities.

      In March 1995, Renaissance Israel and the Renaissance Fund (together, the
"Funds") invested a total of approximately $29 million and acquired a 24.9%
interest in a holding company which acquired 100% of the shares of Shikun
U'Fituach le-Israel Ltd. ("SHOP") from the Israeli government for approximately
$293 million, of which approximately $175 million consisted of non-recourse debt
financing from banks. The Company's interest and share of the investment in this
holding company was 0.7% and $850,000, respectively. SHOP is one of Israel's
largest housing and development companies whose activities include residential
and industrial construction as well as infrastructure for residential areas. On
February 10, 1998, the Funds sold their entire interest in SHOP to Azorim
Development and Investments Company Ltd. ("Azorim") and Clal (Israel) Ltd., the
controlling shareholder of Azorim, for NIS 112.3 million in cash (approximately
$31.3 million) and NIS 40 million (approximately $11.1 million) in shares of
Azorim. The Renaissance Fund's portion of the cash proceeds of the sale was NIS
94.5 million (approximately $25.1 million) and NIS 32.2 million (approximately
$9 million) in shares. The balance of the cash proceeds was distributed among
the investors in Renaissance Israel. The sale price reflects a company valuation
of NIS 600 million (approximately $166.7 million), a greater than 50% increase
in the valuation at which the Funds invested in SHOP in March 1995. The shares
of Azorim are freely tradable on the TASE and will continue to be held by the
Funds. In March 1998, the Company sold shares of Azorim for approximately
$125,000.

      In March 1995, the Funds invested a total of approximately $8 million and
acquired 25.1% of Clalcom Ltd. ("Clalcom"). Clalcom is engaged in the
telecommunications business in Israel and is part of a group that recently won a
bid to be the second international telecommunications carrier in Israel. On
September 3, 1996, the Renaissance Fund made an additional investment in Clalcom
in the form of a capital note, as part of a $3,000,000 investment in Clalcom's
American subsidiary, NKO, Inc. ("NKO"). NKO is developing a data fax
transmission network to compete with traditional voice transmission services.
(The Company also has a direct interest in NKO. See "NKO, Inc.") The capital
note is convertible into ordinary shares of Clalcom at any time. The principal
amount of the note is payable at any time subsequent to August 2016, if not
earlier converted. On October 7, 1997, the Renaissance Fund invested an
additional $862,924 in Clalcom, as its pro rata share of a $4.4 million
investment in Clalcom by existing shareholders. This investment was the second
installment of an $8.4 million investment pursuant to a Clalcom Board of
Directors decision to call additional capital from shareholders to fund
operations. The first installment of $4 million, of which the Renaissance Fund's
pro rata share was $784,476, was made on June 23, 1997. A capital call for an
additional NIS 10 million (approximately $2.8 million) was recently made by
Clalcom, as part of a total additional capital call of up to NIS 70 million
(approximately $19.4 million). The proceeds from this capital call will be used
to repay debt and fund operations. The Fund's (including Renaissance Israel)
portion of the NIS 10 million (approximately $2.8 million) capital call was NIS
2.4 million (approximately $.67 million).

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 and 1997, Carmel invested approximately $30 million for machinery
and infrastructure. On 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


                                       18
<PAGE>

in the third quarter of 1997. As of December 31, 1997, Carmel employed 730
persons.

      As of December 31, 1997, 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 and on a competitive basis.

      Davidson-Atai Publishers Ltd. ("Davidson-Atai")

      On February 27, 1997, the Company sold its 20.7% interest in
Davidson-Atai, a publishing company, to principals of Davidson-Atai for
approximately $100,000. The transaction yielded a nominal profit for the
Company.

      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.

      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.

      Orlite Industries (1959) Ltd. ("Orlite")

      Orlite, formerly known as Orlite Engineering Company Ltd., is one of
Israel's largest manufacturers of composite material products for military and
civilian applications, including specialized fireproof ammunition storage
containers for the Israeli Merkava tank, ballistic helmets for military and
police use, specialized aerospace components, outdoor storage distribution
cabinets for telecommunications, cable and electrical switching equipment and
filament wound non-metallic pressure vessels for agriculture and industrial
water treatment systems.

      On May 8, 1997, Ampal sold (i) all of its direct holdings in Orlite and
(ii) a wholly-owned subsidiary which held a separate interest in Orlite, to ICH
for an aggregate purchase price of $5.3 million plus interest. Ampal recorded a
gain on sale of $.3 million ($.2 million net of taxes in the second quarter of
1997).

      Paradise Industries Ltd. ("Paradise")

      Paradise is a leading manufacturer and distributor of mattresses and
fold-out beds in


                                       19
<PAGE>

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 of the sum was received 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.

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

EMPLOYEES

      As of December 31, 1997, Ampal had 12 employees (one of who subsequently
resigned her position) including one employee whose compensation is shared with
Hapoalim. Ampal (Israel) had five employees (one of who resigned in January
1998), Ampal Industries (Israel) Ltd. had eight employees (which was increased
to nine in March 1998) and Ampal Development (Israel) Ltd. had one
employee as of that date. 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 affect
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.

      The Israeli inflation rate in 1997 was 7.0%, the lowest annual rate since
1969, versus 10.6% in 1996. The highest price increases were in health care
(9.2%), education, culture and entertainment, (8.6%), and food, excluding fruits
and vegetables (8.4%). The housing index rose 7.5%. The only index to decline
was that for clothing and footwear (-4.4%). The relatively low annual inflation
rate is attributed to the Bank of Israel's tight monetary policies. The Israeli
economy grew 2.1% in 1997, the lowest rate of the decade. From 1990 to 1995, the
Gross Domestic Product rose from 6% to 7% annually, declining to 4.6% in 1996.

      During 1997, the shekel was devalued by 8.8% relative to the United States
dollar, a rate which was higher than the annual inflation rate.


                                       20
<PAGE>

      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
Companies' 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           (9.64)          3.0
1993...................       11.2       2.986              8.0            2.93           3.0
1994...................       14.5       3.018              1.1            13.2           2.6
1995...................        8.1       3.135              3.9             4.1           2.8
1996...................       10.6       3.251              3.7             6.6           3.3
1997...................        7.0       3.536              8.8           (1.65)          1.7
                            ------      ------            -----          ------           ---
</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.

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


                                       21
<PAGE>

      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.

CERTAIN ISRAELI REAL ESTATE TAX MATTERS

      Prior to November 1997, a lease of real property with a term of more than
10 years was required to be reported to the Israeli Appreciation Tax Authorities
and was subject to a land appreciation tax or an income tax and an acquisition
tax. The Israeli Tax Commissioner had taken the position that certain
arrangements for the lease of real property, including multiple leases, leases
with renewal options and leases or options to lease between affiliated
companies, which in the aggregate provided a term exceeding 10 years, were
subject to the above reporting and taxes. In November 1997, the law was amended
whereby a lease of real property with a term of up to 25 years is no longer
subject to the above reporting and taxes.

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

      In November 1997, the law was amended whereby a lease of real property
with a term of


                                       22
<PAGE>

up to 25 years is no longer subject to the above reporting and taxes.

                                 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, rental 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, rental 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 1997. Non-residents of
Israel are exempt from the 10% tax on the inflationary gain derived from the
sale of shares in companies that are considered Israeli residents if they choose
to compute the inflationary portion of the gain based on the change in the rate
of exchange between Israeli currency and the foreign currency in which the
shares were purchased from the date the shares were purchased until the date the
shares were sold.

      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)


                                       23
<PAGE>

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).

      In connection with the transfers in 1992 of its stock in Granite to
separate foreign subsidiaries, Ampal entered into gain recognition agreements
with the Internal Revenue Service. Under these agreements, if either foreign
subsidiary sells all or a portion of its stock in Granite before 2003, Ampal
generally will be required to recognize for tax purposes a proportionate amount
of gain based upon the fair market value of the stock sold on the date of the
transfer to the foreign subsidiary, and to pay tax due in respect of such gain
together with interest accrued on such tax since the date of the gain
recognition agreement.

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 1997, Ampal's total payment to Hapoalim in
connection with this lease was $155,000. Pursuant to the sublease agreement,
Ampal was entitled to one month's free rent in 1997.


                                       24
<PAGE>

      The Company leases office space in various locations in the United States
and 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 1997 of approximately $2,953,000. 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 $4,154,000 in rent for such spaces in 1997.

      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. A hearing was held in the spring of 1996 though no
judgment has yet been rendered.

      For a description of a claim for NIS 3.6 million asserted against Ampal
Financial, see "Real Estate, Finance and Other Holdings-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:

                                                             HIGH         LOW
                                                             ----         ---
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

1996:
Fourth Quarter.........................................    $  5 1/8    $  4 9/16
Third Quarter..........................................       5 1/8       4 3/8
Second Quarter.........................................     5 15/16       4 5/8
First Quarter..........................................       7 1/8       5 1/8

      As of March 20, 1998, there were 1,178 record holders of Class A Stock.

      Redeemable Warrants to purchase Class A Stock, issued in connection with
Ampal's 1994 public offering, are listed on the AMEX under the symbol "AIS.WS."
The warrants are exercisable until January 31, 1999, but became callable by
Ampal, in whole or in part, on February 1, 1996 without payment to the holder.

      At their annual meeting held on May 28, 1997, Ampal's shareholders voted
to eliminate Ampal's Common Stock, $1.00 par value (the "Common Stock").


                                       25
<PAGE>

                                  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 and 1997, Ampal did not pay a
dividend on the Class A Stock and 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 61/2% 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 10, 1997, Ampal announced that
its Board of Directors had declared cash dividends on its preferred stock
($0.325 per share of its 61/2% Preferred Stock and $0.20 per share of 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. Emmes is a wholly-owned
subsidiary of Emmes & Company LLC. Mr. Michael Sonnenfeldt, a director of Ampal,
is the founder and managing director of Emmes & Company LLC. On January 20,
1998, Ampal issued 300 shares to Mr. Davidoff, as custodian, and anticipates
issuing additional shares on April 1, 1998 and each April 1, thereafter. 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.


                                       26
<PAGE>

Item 6

SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,          1997            1996             1995             1994             1993
----------------------------------------------------------------------------------------------------------
                                              (Dollars in thousands, except per share data)
<S>                           <C>            <C>               <C>              <C>              <C>
Revenues ..................   $  56,114      $  44,360         $  44,713        $  43,745        $  42,679
Net income (loss) .........      14,183        (10,252)(3)         2,166(3)         7,334(3)           226(3)(4)
Earnings (loss) per Class A
 share:
 Basic EPS ................   $     .58(1)   $    (.45)(1)(3)  $     .07(1)(3)  $     .30(1)(3)  $    (.01)(1)(3)(4)
 Diluted EPS ..............         .50(2)        (.38)(2)(3)        .06(2)(3)        .25(2)(3)       (.01)(2)(3)(4)
Total assets ..............     262,274        283,551           312,094          301,194          271,124
Notes, deposits and
 debentures payable .......      65,053        102,414           115,881           95,995          124,745
Dividends declared per
 Class A share ............   $      --      $      --         $     .21        $      --        $      --

(1)   Computation is based on net income (loss) after deduction of preferred
      stock dividends of $351, $364, $560, $406 and $440, respectively.

(2)   Computation is based on net income (loss) after deduction due to dilution
      in equity in earnings of affiliate of $258, $363, $402, $556 and $419,
      respectively.

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

<CAPTION>
YEAR ENDED DECEMBER 31,          1997         1996           1995          1994            1993
--------------------------------------------------------------------------------------------------
<S>                           <C>         <C>             <C>            <C>            <C>
(Loss) income from
 discontinued
 operations ...............   $      --   $  (2,892)      $  (4,315)     $     969      $    (214)
(Loss) earnings per Class A
 share from discontinued
 operations:
 Basic EPS ................   $      --   $    (.12)      $    (.18)     $     .04      $    (.01)
 Diluted EPS ..............          --        (.10)           (.15)           .04           (.01)
</TABLE>

(4)   Includes cumulative effect on prior years of change in accounting
      principle of $(4,982), equal to $(.27) and $(.21) per share, respectively,
      for Basic EPS and Diluted EPS.


                                       27
<PAGE>

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 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 of shareholders'
equity.

Should the NIS be devalued against the dollar, cumulative translation
adjustments are likely to result in reductions of shareholders' equity. As of
December 31, 1997, the effect on shareholders' equity was a decrease of
approximately $10.1 million. Upon disposition of an investment, the related
cumulative translation adjustment balance will be recognized in determining
gains or losses.


                                       28
<PAGE>

YEAR 2000 COMPLIANCE
--------------------

      The Company is currently in the process of identifying, evaluating and
implementing changes to computer programs necessary to address the year 2000
issue which is the result of 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 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 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.

RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------

      In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components (revenue,
expenses, gains, and losses) in a full set of general purpose financial
statements. The Company will adopt SFAS No. 130 in the first quarter of 1998.

      In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers, and the material countries in
which the entity holds assets and reports revenue. The Company will adopt SFAS
No. 131 in its fiscal year 1998.

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 and 1995
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, 1997 Compared to Year Ended December 31, 1996
---------------------------------------------------------------------

Consolidated income from continuing operations increased to $14.6 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 Holdings Ltd. ("Ophir"), the Company's 42.5%-owned
affiliate, which is a holding company with interests in high technology and real
estate companies, 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 Communications Ltd. ("Teledata"), gains on sale of


                                       29
<PAGE>

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 losses recorded by the
Company's 50%-owned affiliate, Trinet Venture Capital Ltd. ("Trinet"), a
high-technology venture capital fund, which recorded unrealized losses on its
investments in 1997 as compared to unrealized gains in 1996, and losses of
Carmel Container Systems Limited ("Carmel"), the Company's 20.7%-owned
affiliate, which is a manufacturer of paper-board packaging and related
products. 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 Hotels Ltd. ("Moriah"), the Company's 46%-owned affiliate, which is one
of the largest hotel chains in Israel, 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 ("800 Second Avenue").
See Liquidity and Capital Resources. 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
investment in its 21.9%-owned Israeli-based software company, U.D.S. - Ultimate
Distribution Systems Ltd., and in Geotek Communications Inc., 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 Industries Ltd. ("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 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


                                       30
<PAGE>

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 will result in the elimination of certain corporate
positions, will be completed in early 1998, and primarily relates 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.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
---------------------------------------------------------------------

Consolidated income from continuing operations decreased from $6.5 million in
1995, to a loss of $7.4 million in 1996. The decrease in income in 1996 resulted
primarily from the loss recorded with respect to the impairment of the Company's
investment in M.D.F., decreases in equity in earnings of affiliates, unrealized
losses on investments, losses incurred by Paradise, higher net interest expense
and an unrealized loss on rental property. These decreases were partially offset
by an increase in net rental income.

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. M.D.F.'s sales prices were affected by the decrease
in worldwide prices of all wood-connected products, and to the establishment of
nearly 30 new plants for the production of medium density fiber boards
throughout the world. 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 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; 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. In addition, the
owner of the other 50% interest in M.D.F. has agreed to provide additional funds
in the amount of up to $2 million to M.D.F., if required for M.D.F. to meet its
obligations.

Equity in earnings of affiliates decreased from $7.4 million in 1995, to $6.3
million in 1996. The decrease was primarily attributable to losses recorded by
the Company's 50%-owned affiliate, CWI. On September 27, 1996, a wholly-owned
subsidiary of CWI 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 was $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 was $1 million, $.7 million net of taxes) to adjust
the carrying value of its investment to net realizable value.

Moriah, recorded lower earnings in 1996 primarily because its Tel Aviv hotel was
closed for renovations for part of the year. Moriah also experienced decreases
in room rates which resulted from the decrease in tourism to Israel in 1996. The
Tel Aviv hotel, which had undergone a $16 million renovation, of which $4
million was provided by the landlord, partially reopened in April 1996, and its
renovations were completed in the fourth quarter of 1996.

The decreases noted above were partially offset by the increased earnings
recorded by Trinet, a high technology venture capital fund, which recorded
unrealized gains on its investments in Smart-Link Ltd. ("Smart-Link"), Imagenet
Ltd. ("Imagenet") and Logal Software and Educational Systems Ltd. ("Logal").
Smart-Link, which is engaged in development of products in the field of
multimedia and computers, issued 27.3% of its shares to various investors for $3
million in November 1996. Imagenet, which develops and markets computer-aided
network engineering software products, completed a $2.5 million private
placement for 26.7% of its shares in June 1996. Logal, which markets
computerized educational systems for learning sciences in high schools and
colleges, completed a $13 million public offering in February 1996 in the United
States. In addition, Ophir the


                                       31
<PAGE>

Company's 42.5%-owned affiliate, reported improved results in 1996 which are
primarily attributable to gains it recorded with respect to the initial public
offering conducted by its affiliate, Memco Software, Ltd. on October 17, 1996,
and to the increased earnings of its affiliate, Teledata. Teledata's earnings
improved as a result of increased sales, mainly because of its more successful
marketing efforts.

Manufacturing revenues and expenses reflect the operations of Paradise, which
recorded losses in 1996, primarily in the third quarter, because of increased
advertising and promotional expenses in connection with a new marketing program.

Interest income decreased in 1996 primarily as a result of lower balances of
interest-earning assets and lower interest rates in 1996. Interest expense
increased in 1996 mainly because of debt incurred in connection with the
purchase of 800 Second Avenue.

On June 28, 1995, the Company's then 94%-owned subsidiary purchased 800 Second
Avenue for approximately $45 million. The approximately 290,000 rentable
square-foot office building houses the Consulate of the Government of Israel
(the "Government") in New York and other Israeli government offices as well as
other tenants. The property was converted into a condominium in December 1996.
On January 31, 1997, the Company sold to the Government the portion of the
building which it occupies for $31 million. 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 increases in rental income and rental property expenses in 1996 were
attributable to the operations of 800 Second Avenue.

The Company recorded $.6 million of unrealized losses and $.3 million of
unrealized gains on marketable securities and $2 million and $1.9 million of
gains on sale of investments in 1996 and 1995, respectively. The realized gains
recorded in 1996 were mainly attributable to the Company's investments in
Teledata and M-Systems Flash Disk Pioneers Ltd. ("M-Systems"), whereas the gains
recorded in 1995 were mainly attributed to the Company's investment in Mercury
Interactive Corporation ("Mercury"). Unrealized losses in 1996 were attributed
to the Company's investments in Idan Software Industries I.S.I., Ltd. ("Idan")
and in Mercury.

The change in the effective income tax rate in 1996 is mainly attributable to
the losses of certain Israeli subsidiaries and affiliates (including M.D.F.)
from which no tax benefits are available.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

At December 31, 1997, cash and cash equivalents were approximately $45.5 million
as compared with $20.6 million at December 31, 1996. During 1997, deposits,
notes and loans receivable, notes and loans payable, and outstanding debentures
decreased as a result of scheduled repayments. In 1997 the Company received
dividends from affiliates amounting to $9.7 million. In January 1997, the
Company sold a condominium unit in 800 Second Avenue to the Government of Israel
(the "Government") for $31 million. At that time the Government paid $15 million
and gave the Company a note for the remaining $16 million, of which $8 million
was repaid in December 1997, and the remainder was repaid in January 1998. The
decrease in real estate rental property and notes and loans payable are
primarily attributable to this sale. The Company's cash position and debt
obligations were affected by the transaction with Motorola Communications
Israel, Ltd. in January 1998. See Subsequent Event noted below.

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% of FundTech Ltd., 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 12% (increased in 1998 by $.8 million to
18%) 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


                                       32
<PAGE>

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.

As of December 31, 1997, the Company had issued guarantees on certain
outstanding loans to its investees and subsidiaries in the aggregate principal
amount of $13.2 million, and has commitments issued to its investees of up to
$12.7 million.

In 1997 and 1996 Ampal paid dividends in the amount of $.20 and $.325 per share
on its 4% and 6-1/2% Cumulative Convertible Preferred Stock, respectively. Total
dividends paid in both years amounted to approximately $.4 million.

SUBSEQUENT EVENT
----------------

      On January 22, 1998 the Company completed its purchase of a one-third
interest in the assets of the shared networks operation of Motorola
Communications Israel, Ltd. ("Motorola Israel") for a purchase price of $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, 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.
Each loan has a term of 90 days and bears interest at a rate of LIBOR plus 1/2%.
The Company anticipates replacing the aforementioned short-terms loans with
long-term financing.

      A new wireless communications service provider ("Provider" or
"Corporation"), one-third owned by the Company and two-thirds owned by Motorola
Israel, will coordinate and operate 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's
iDEN(TM) integrated wireless communication technology, which is known as MIRS in
Israel.

      The Company owns all of the authorized preferred shares of the Corporation
and Motorola Israel owns all of the authorized ordinary shares. Each share
issued by the Corporation will be entitled to one vote.

      To the extent of available after-tax profits, the Provider is required to
pay distributions or dividends to the Company equal to at least $3,800 for
fiscal year 2000 and $7,100 for each fiscal year thereafter so long as the
financial stability of the Provider will not be impaired. The Provider shall
endeavor to pay distributions or dividends in the following amounts: for fiscal
year 1998, $4,950, for fiscal year 1999, $10,725 and for fiscal year 2000 and
thereafter, $23,430 (inclusive of the required payments), which all holders of
an interest in the Provider shall share on a pro rata basis. To the extent that
any of the above distributions or dividends are not paid by the Provider, they
will accumulate. No dividends will be paid by the Corporation to Motorola Israel
until the Company has received all of its accumulated dividends. Any
distributions or dividends which are paid in excess of the above amounts for a
given fiscal year will similarly be paid pro rata to the Company and Motorola
Israel based on their shares in the Provider.

      Pursuant to the purchase agreement, Motorola Israel guaranteed that the
Company would receive from the Provider at least $3,800 for fiscal year 2000 and
$7,100 for each fiscal year between 2001 and 2005 inclusive, subject to an
obligation of the Company to repay such guarantee payments in amount equal to
the excess of the amount actually received by the Company from the Provider with
respect to any subsequent year over $7,500.

      The $110 million purchase price for the Company's one-third interest in
the Provider was based upon the Company's current valuation of the SNO and its
prospects. The purchase agreement provides that under specified circumstances
indicating that there has been an increase in the enterprise value of the
Corporation, the Company must pay Motorola Israel an additional amount (the
"Bonus"). The formula for the Bonus varies depending upon whether an initial
public offering of the Corporation's shares (an "IPO") has been consummated. If
an IPO is consummated prior to December 31, 2002, the Company must pay Motorola
Israel a Bonus based on an increase in the valuation of the Corporation for
purposes of the IPO. In no event will such Bonus payment exceed $33 million
multiplied by 1.16(n), 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 Company's preferred shares up to that
time have been paid, then the Company must pay Motorola Israel a Bonus if (A)
the present value of the actual after tax net income of the Corporation (as
reported by the Corporation's 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 the Corporation is more than $5 million) for fiscal years 1998 through 2002,
discounted at the rate of 13%, exceed (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.

      In March 1998, the Company transferred its interest in the Provider to a
limited partnership (the "Partnership"). A wholly-owned Israeli subsidiary of
the Company (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, 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 closing date
until the purchase date of the limited partnership interests).

      The related parties purchased their limited 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 will assume
their pro rata share of Ampal's long term financing.

      The Partnership is entitled to all of the Company's rights under the
purchase agreement and has assumed all of its obligations.


                                       33
<PAGE>

                    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 (a New York corporation) and subsidiaries (the "Company") as
of December 31, 1997 and 1996, 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, 1997. 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 18% and 32%, respectively, in 1997, 43% and 44%,
respectively, in 1996, and revenues of 35% in 1995, 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, or the financial statements of
a discontinued operation. The Company's equity in net earnings of these
affiliated companies and the loss from discontinued operations in 1995
represents $18,611,000, $10,443,000, and $4,376,000 of consolidated net income
(loss) for the years ended December 31, 1997, 1996 and 1995, respectively. The
statements of these subsidiaries, affiliated companies and the discontinued
operation 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 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, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.


                                             /s/ Arthur Andersen LLP


New York, New York
March 26, 1998


                                       34
<PAGE>

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                1997         1996         1995
-------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S>                                    <C>            <C>         <C>          <C>
REVENUES:
Equity in earnings of affiliates (Note 11)......      $18,703     $  6,333     $  7,424
Manufacturing...................................       12,127       10,891       10,159
Interest:
 Related parties................................        6,988        9,918       10,811
 Others.........................................        2,743        1,956        3,629
Rental income...................................        7,107       11,663        7,793
Realized and unrealized gains on investments
 (Notes 3 and 5)................................        5,466        1,342        2,193
Gain on sale of real estate rental property
 (Note 3).......................................            -            -          526
Other ..........................................        2,980        2,257        2,178
                                                      -------     --------     --------
     Total revenues.............................       56,114       44,360       44,713
                                                      -------     --------     --------

EXPENSES:
Manufacturing...................................       12,569       12,027        9,436
Interest:
 Related parties................................        2,544        3,918        3,108
 Others.........................................        6,719       10,163        9,813
Rental property operating expenses..............        3,273        5,670        2,886
Loss from impairment of investments (Notes 3 and
 11(c)) ........................................        2,185       10,083            -
Unrealized loss on rental property (Note 3).....            -        1,095            -
Other...........................................        8,030        6,865        7,122
                                                      -------     --------     --------
     Total expenses.............................       35,320       49,821       32,365
Restructuring charge (Note 15) .................        1,300            -            -
                                                      -------     --------     --------
Income (loss) from continuing operations before
income taxes....................................       19,494       (5,461)      12,348
Provision for income taxes (Note 10)............        5,311        1,899        5,867
                                                      -------     --------     --------
Income (loss) from continuing operations........       14,183       (7,360)       6,481
                                                      -------     --------     --------
Discontinued operations (Note 2):
 Loss from operations...........................            -       (3,610)      (4,315)
 Loss on disposition of $3,169, net of
  applicable tax benefit of $3,887..............            -          718            -
                                                      -------     --------     --------
Loss from discontinued operations...............            -       (2,892)      (4,315)
                                                      -------     --------     --------

     NET INCOME (LOSS)..........................      $14,183     $(10,252)    $  2,166
                                                      =======     ========     ========

Basic EPS (Note 9)
 Earnings (loss) from continuing operations.....      $   .58      $  (.33)      $   .25
 Loss from discontinued operations..............            -         (.12)         (.18)
                                                      -------      -------       -------
 Earnings (loss) per Class A share .............      $   .58      $  (.45)      $   .07
                                                      =======      =======       =======

 Shares used in calculation (in thousands)......       23,742       23,549       23,677

Diluted EPS (Note 9)
 Earnings (loss) from continuing operations.....      $   .50      $  (.28)     $   .21
 Loss from discontinued operations..............            -         (.10)        (.15)
                                                      -------      -------      -------
 Earnings (loss) per Class A share..............      $   .50      $  (.38)     $   .06
                                                      =======      =======      =======

 Shares used in calculation (in thousands) .....       27,615       27,613       27,980

Dividends per Class A share.....................      $     -      $     -     $    .21
</TABLE>

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


                                       35
<PAGE>

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

                                                   DECEMBER 31,    DECEMBER 31,
ASSETS AS AT                                          1997            1996
-------------------------------------------------------------------------------
(Dollars in thousands)                                                (Note 1)

Cash and cash equivalents.......................      $ 45,457        $ 20,633

Deposits, notes and loans receivable (Note 4)...        46,176          57,041

Investments (Notes 5 and 11)....................       117,384         123,084

Real estate rental property, less accumulated
 depreciation of $5,902 and $6,215 (Note 3).....        28,603          58,199

Property and equipment, less accumulated
 depreciation of $2,596 and $4,041..............         3,899           5,571

Other assets....................................        20,755          19,023
                                                      --------        --------


TOTAL ASSETS....................................      $262,274        $283,551
                                                      ========        ========

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


                                       36
<PAGE>

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

LIABILITIES AND                                     DECEMBER 31,    DECEMBER 31,
SHAREHOLDERS' EQUITY AS AT                             1997            1996
--------------------------------------------------------------------------------
(Dollars in thousands)                                                  (Note 1)

LIABILITIES
Notes and loans payable: (Note 6)
  Related parties.................................    $  18,207        $ 34,005
  Others..........................................        5,000          10,538
Debentures (Note 7)...............................       41,846          57,871
Accounts and income taxes payable, accrued
 expenses and minority interests..................       34,711          29,017
                                                      ---------        --------

        Total liabilities.........................       99,764         131,431
                                                       --------        --------

SHAREHOLDERS' EQUITY (Note 8)
4% Cumulative Convertible Preferred Stock, $5
 par value; authorized 189,287 and 650,000
 shares; issued and outstanding 179,672 and
 190,936 shares...................................          898             955

6-1/2% Cumulative Convertible Preferred Stock,
$5 par value; authorized 988,055 and 4,282,850
shares; issued and outstanding 968,288 and
1,002,483 shares..................................        4,842           5,012

Class A Stock, $1 par value;  authorized
 60,000,000 shares; issued 24,418,325 and
24,256,420 shares; outstanding 23,812,925 and
23,651,020 shares.................................       24,418          24,257

Additional paid-in capital........................       57,491          57,410

Retained earnings.................................       88,775          74,943
Treasury Stock, 605,400 shares of Class A Stock,
 at cost..........................................       (3,829)         (3,829)
Cumulative translation adjustments................      (10,085)         (6,530)
Unrealized loss on marketable securities..........            -             (98)
                                                       --------        --------

        Total shareholders' equity................      162,510         152,120
                                                       --------        --------


TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........     $262,274        $283,551
                                                       ========        ========

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


                                       37
<PAGE>

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                1997         1996         1995
----------------------------------------------------------------------------------------
(Dollars in thousands)                                            (Note 1)     (Note 1)
<S>                                                  <C>         <C>           <C>
Cash flows from operating activities:
 Net income (loss)..............................     $ 14,183    $ (10,252)    $  2,166
 Adjustments to reconcile net income (loss) to
  net cash provided by operating activities:
  Equity in earnings of affiliates..............      (18,703)      (6,333)      (7,424)
  Loss from discontinued operations.............            -        2,892        4,315
  Realized and unrealized gains on investments..       (5,466)      (1,342)      (2,193)
  Gain on sale of real estate rental property...            -            -         (526)
  Unrealized loss on rental property............            -        1,095            -
  Depreciation expense..........................        1,559        2,038        1,627
  Amortization expense..........................        1,754        3,587        4,446
  Loss from impairment of investments...........        2,185       10,083            -
  Restructuring charge .........................        1,300            -            -
  Minority interests............................         (220)        (551)        (298)
 Decrease (increase) in other assets............          565       (3,158)      (1,331)
 Increase (decrease) in accounts and income
  taxes payable, accrued expenses and minority
  interests.....................................        4,810         (232)      (2,371)
 Investments made in trading securities.........       (9,143)      (2,391)      (6,403)
 Proceeds from sale of trading securities.......        8,359        3,254       13,379
 Dividends received from affiliates.............        9,719        1,806        4,898
                                                     --------     --------     --------

  Net cash provided by operating activities.....       10,902          496       10,285
                                                     --------     --------     --------

Cash flows from investing activities:
 Deposits, notes and loans receivable collected.       27,124       17,546       26,958
 Deposits, notes and loans receivable granted...       (1,024)      (2,046)      (5,426)
 Investments made in:
  Available-for-sale securities.................            -         (228)      (1,369)
  Affiliates and others.........................      (11,159)     (11,497)     (34,143)
 Proceeds from sale of investments:
  Available for sale securities.................        1,537            -            -
  Affiliates and others.........................       25,212       14,934       36,391
 Purchase of real estate rental property........       (1,034)      (2,475)     (45,408)
 Purchase of property and equipment.............       (1,182)        (380)        (499)
 Proceeds from sale of real estate rental
  property......................................       15,059            -        1,426
                                                     --------     --------     --------

  Net cash provided by (used in) investing
   activities...................................       54,533       15,854      (22,070)
                                                     --------     --------     ---------
</TABLE>


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


                                       38
<PAGE>

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                1997         1996         1995
----------------------------------------------------------------------------------------
(Dollars in thousands)                                            (Note 1)     (Note 1)
<S>                                                  <C>          <C>          <C>
Cash flows from financing activities:
 Notes and loans payable received:
  Related parties...............................     $  4,050     $  2,187     $ 30,892
  Others........................................          931        8,201        1,056
 Notes and loans payable repaid:
  Related parties...............................      (20,091)      (4,866)      (5,890)
  Others........................................       (6,184)      (1,950)        (958)
 Debentures repaid..............................      (17,301)     (22,180)     (10,909)
 Proceeds from issuance of shares to minority
  interests.....................................            -            -           50
 Dividends paid.................................         (351)        (364)      (5,614)
 Purchase of treasury shares....................            -            -       (3,829)
                                                     --------     --------     --------
  Net cash (used in) provided by financing
   activities...................................      (38,946)     (18,972)       4,798
                                                     --------     --------     --------

Effect of exchange rate changes on cash and
 cash equivalents...............................       (1,665)      (2,479)      (1,275)
                                                     --------     --------     --------

Net increase (decrease) in cash and cash
 equivalents....................................       24,824       (5,101)      (8,262)
Cash and cash equivalents at beginning of year..       20,633       25,734       33,996
                                                     --------     --------     --------

Cash and cash equivalents at end of year........     $ 45,457     $ 20,633     $ 25,734
                                                     ========     ========     ========

Supplemental Disclosure of Cash Flow Information
Cash paid during the year:
 Interest:
  Related parties...............................     $  1,257     $  2,384     $  1,611
  Others........................................        2,820        3,309        3,084
                                                     --------     --------     --------
    Total interest paid.........................     $  4,077     $  5,693     $  4,695
                                                     ========     ========     ========

Income taxes paid...............................     $    714     $  3,729     $  6,903
                                                     ========     ========     ========
</TABLE>


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


                                       39
<PAGE>

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                              1997        1996        1995
------------------------------------------------------------------------------------
(Dollars in thousands, except share amounts and per share data)
<S>                                                <C>         <C>         <C>

4% PREFERRED STOCK
Balance, beginning of year .....................   $    955    $    995    $  1,033
Conversion of 11,264, 8,094 and 7,578 shares
 into Class A Stock ............................        (57)        (40)        (38)
                                                   --------    --------    --------
Balance, end of year ...........................   $    898    $    955    $    995
                                                   ========    ========    ========

6-1/2% PREFERRED STOCK
Balance, beginning of year .....................   $  5,012    $  5,263    $  5,575
Conversion of 34,195, 50,116 and 62,328 shares
 into Class A Stock ............................       (170)       (251)       (312)
                                                   --------    --------    --------
Balance, end of year ...........................   $  4,842    $  5,012    $  5,263
                                                   ========    ========    ========

CLASS A STOCK
Balance, beginning of year .....................   $ 24,257    $ 21,066    $ 20,841
Issuance of shares upon exchange of Common Stock         --       3,000          --
Issuance of shares upon conversion of
 Preferred Stock ...............................        158         191         225
Issuance of shares as payment for services .....          3          --          --
                                                   --------    --------    --------
Balance, end of year ...........................   $ 24,418    $ 24,257    $ 21,066
                                                   ========    ========    ========

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

ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year .....................   $ 57,410    $ 57,310    $ 57,185
Conversion of Preferred Stock ..................         69         100         125
Issuance of shares as payment for services .....         12          --          --
                                                   --------    --------    --------
Balance, end of year ...........................   $ 57,491    $ 57,410    $ 57,310
                                                   ========    ========    ========

RETAINED EARNINGS
Balance, beginning of year .....................   $ 74,943    $ 85,559    $ 89,007
Net income (loss) ..............................     14,183     (10,252)      2,166
Dividends:
  4% Preferred Stock - $.20, $.20 and $1.05
  per share ....................................        (36)        (38)       (209)
  6-1/2% Preferred Stock - $.325 per share .....       (315)       (326)       (351)
  Class A Stock - $.21 per share ...............         --          --      (4,424)
  Common Stock - $.21 per share ................         --          --        (630)
                                                   --------    --------    --------
Balance, end of year ...........................   $ 88,775    $ 74,943    $ 85,559
                                                   ========    ========    ========

TREASURY STOCK
Balance, beginning of year .....................   $ (3,829)   $ (3,829)   $     --
Purchase of 605,400 shares of Class A Stock
 at cost .......................................         --          --      (3,829)
                                                   --------    --------    --------
Balance, end of year ...........................   $ (3,829)   $ (3,829)   $ (3,829)
                                                   ========    ========    ========
</TABLE>


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


                                       40
<PAGE>

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                1997         1996         1995
----------------------------------------------------------------------------------------
(Dollars in thousands, except share amounts and per share data)
<S>                                                  <C>          <C>          <C>
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance, beginning of year......................     $ (6,530)    $ (4,354)    $ (2,636)
Foreign currency translation adjustment.........       (3,555)      (2,176)      (1,718)
                                                     --------     --------     --------
Balance, end of year............................     $(10,085)    $ (6,530)    $ (4,354)
                                                     ========     ========     ========

UNREALIZED LOSS ON MARKETABLE SECURITIES
Balance, beginning of year......................     $    (98)    $   (595)    $   (511)
Unrealized gain, net............................           98            -            -
Transfer to trading securities..................            -           67            -
Write-down due to permanent impairment..........            -          511            -
Unrealized loss, net............................            -          (81)         (84)
                                                     --------     --------     --------
Balance, end of year............................     $      -     $    (98)    $   (595)
                                                     ========     ========     ========
</TABLE>


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


                                       41
<PAGE>

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, 1997, Hapoalim and its wholly-owned
subsidiary, Atad Hevra Lehashkaot Limited owned 24.7% 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 included in the cumulative
translation adjustment account of shareholders' equity.

      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 quarterly and annual basis for impairment whenever events or
changes in circumstances


                                       42
<PAGE>

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


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 $28
million, since such earnings are currently expected to be permanently reinvested
outside the United States. If the earnings were not considered permanently
invested, approximately $10 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.

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 and 1995 consolidated financial statements.

Note 3 - Acquisitions and Dispositions

(a) 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., 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 12% (increased in 1998 by $.8 million to
19.1%) 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.

(b) 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


                                       43
<PAGE>

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.

(c) 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.

(d) 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.

(e) 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.

(f) 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.

(g) 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.

(h) In January 1995, the Company invested $1.5 million to acquire a 20% equity
interest in Epsilon Investment House Ltd. ("Epsilon") and its affiliate,
Renaissance Investment Company Ltd. ("Renaissance"). Epsilon is an investment
bank which provides portfolio management and Renaissance provides underwritng
services in Israel through its subsidiaries.

(i) 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.

(j) In 1995, the Company invested an aggregate of approximately $2.6 million for
13.6% of Breeze Wireless Communications Ltd. (8.3% at December 31, 1997), an
Israeli company which develops, manufactures and markets wireless local area
networks for computers, 4.1% of M-Systems Flash Disk Pioneers Ltd. (1.4% at
December 31, 1997), an Israeli company which develops, manufactures and markets
data storage media based on "flash memory," a silicon memory chip, and 5.8% of
Comfy Interactive Movies Ltd., an Israeli company which develops and markets a
computer keyboard and interactive movies specially designed for children ages
1-6.

(k) On August 15, 1995, Ampal sold all of its Ordinary Shares and 7% Preferred
Shares of Bank Hapoalim (Cayman) Ltd. ("Cayman"), which constituted 49% and 50%
of each series, respectively, to Hapoalim. The sales price was approximately
$20.3 million and the Company recorded a gain on sale of approximately $.4
million ($.2 million, net of taxes). The Company obtained an opinion from an
independent investment consultant that the consideration received in the sale
was fair to the Company.

(l) On November 6, 1995, Ampal sold its property located at 174 North Michigan
Avenue, Chicago, Illinois to an unrelated party for $.85 million. In connection
therewith, Ampal received $.55 million from Hapoalim and Ampal, as landlord, and
Hapoalim, as tenant, released each other from their respective obligations under
a lease which was scheduled to expire in 2007. Ampal obtained an opinion from an
independent real estate


                                       44
<PAGE>

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


consultant that the consideration received from Hapoalim was fair to Ampal. The
Company recorded a total gain of approximately $.5 million ($.3 million, net of
taxes).

(m) In 1995 the Company received gross proceeds in the amount of $1.9 million
from sales of 106,000 shares of DSP Group, Inc. ("DSP Group") and recorded a
loss of $.1 million.

(n) In 1995 the Company received gross proceeds in the amount of $4 million
from sales of 237,000 shares of Mercury Interactive Corporation ("Mercury"),
which the Company acquired in 1992, and recorded a gain of approximately $.9
million ($.6 million after taxes).

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 8 years and notes and loans
receivable have maturities of up to 4 years. At December 31, 1997 and 1996,
deposits, notes and loans receivable from related parties were $36.7 million and
$56.1 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, 1997 and
1996 are as follows:

                                                       Unrealized        Market
December 31, 1997                           Cost      Gains/(Losses)     Value
-----------------                         --------------------------------------

Bonds                                     $  479         $ (122)         $  357
Equity Securities                          5,433          1,663           7,096
                                          ------          -----          ------

Total Trading Securities                  $5,912         $1,541          $7,453
                                          ======         ======          ======

                                                       Unrealized        Market
December 31, 1996                           Cost      Gains/(Losses)     Value
-----------------                         --------------------------------------

Bonds                                     $  580         $  (85)         $  495
Equity Securities                          3,592            841           4,433
                                          ------         ------          ------

Total Trading Securities                  $4,172         $  756          $4,928
                                          ======         ======          ======

      In the years ended December 31, 1997, 1996 and 1995, the Company recorded
$.9 million, $(.1) million, and $.3 million of unrealized gains (losses),
respectively, on trading securities in the statement of income.

      During 1997, 1996 and 1995 the Company invested approximately $9.1
million, $2.4 million, and $6.4 million, respectively, in marketable securities,
which are classified as trading securities.

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

      At December 31, 1997, the Company did not have any available-for-sale
securities. In 1996, the aggregate fair value of available-for-sale securities
was $1.4 million (cost - $2.1 million).


                                       45
<PAGE>

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


      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 2006.

      On June 28, 1995, in connection with the purchase of the building located
at 800 Second Avenue, New York, New York, the Company borrowed $30 million from
Hapoalim at an interest rate based on London Interbank Offered Rates plus 1%. On
January 31, 1997, in connection with the sale of a portion of the premises to
the Government (see Note 3(e)), $15 million received from the Government was
used to repay a portion of the loan to Hapoalim. The remaining balance of the
loan of $15 million is due on February 28, 1999 and bears interest commencing
January 6, 1998 at the rate of LIBOR plus .75% (at December 31, 1997 the rate
was LIBOR plus 1/2%, or 6.4375%).

      The weighted average interest rates on the balances of short-term
borrowings at year-end are as follows: 6.59% on $2.5 million and 9.05% on $20.6
million in 1997 and 1996, respectively.

Note 7 - Debentures

Debentures outstanding at December 31 consist of:

                                                               1997       1996
                                                             -------------------
Ampal:
------
 Various series with interest rates ranging from
 10%-12%, maturing 1998-2003............................     $20,306     $31,458

Ampal Development (Israel) Ltd.:
--------------------------------
 Various series with interest rates ranging from
 6.2%-7.5%, linked to the Consumer Price Index in
 Israel, maturing 1998-2005, secured by assets of
 $30 million............................................      29,211      35,559
                                                             -------     -------

                                                              49,517      67,017

Less: Unamortized discounts.............................       7,671       9,146
                                                             -------      ------

Total..................................................      $41,846     $57,871
                                                             =======     =======

      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:

1998.............................      $18,137*
1999.............................        6,165
2000.............................        6,744
2001.............................        2,013
2002.............................        2,013
Thereafter.......................        6,137

* If no debentures are presented for early redemption, scheduled maturities will
amount to $8,284.

Note 8 - Shareholders' Equity

      Capital Stock


                                       46
<PAGE>

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


      The 4% and 6-1/2% preferred shares are convertible into 5 and 3 shares of
Class A Stock, respectively. At December 31, 1997, a total of 8,424,124 shares
of Class A Stock is reserved for issuance upon the conversion of the Preferred
Stock and the exercise of 4.5 million warrants and 120,900 options.

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

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

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

      Preferred shares are nonvoting unless dividends are in arrears for three
successive years. At December 31, 1997, there are no dividend arrearages.

      On December 11, 1996, Ampal issued 3,000,000 shares of Class A Stock in
exchange for the 3,000,000 shares of Common Stock held by Hapoalim.

      Retained Earnings

      At December 31, 1997, retained earnings include $61 million for affiliates
accounted for by the equity method, of which $31.3 million and an additional
$45.8 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 - Earnings Per Class A Share

      Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("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. SFAS No. 128 requires the presentation of both basic EPS and diluted EPS
on the face of the income statement. Earnings per share amounts for prior years
have been restated to conform with the provisions of SFAS No. 128.

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

(In thousands, except per share data)

                                                Year Ended December 31, 1997
                                             -----------------------------------
                                                                       Per Share
                                               Income        Shares      Amounts
                                             -----------------------------------
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
                                             =======         ======      ======


                                       47
<PAGE>

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

(In thousands, except per share data)

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

Effect of Dilutive Securities:
 Conversion of 4% and 6-1/2% Preferred
  Stocks..................................                         4,064
                                                                  ------

Diluted EPS:
 Loss from continuing operations..........       $ (7,723)(2)                     $ (.28)
 Loss from discontinued operations........         (2,892)                          (.10)
                                                 --------                         ------
 Net loss attributable to Class A Stock...       $(10,615)        27,613          $ (.38)
                                                 ========         ======          ======

<CAPTION>
                                                       Year Ended December 31, 1995
                                                 -----------------------------------------
                                                                                 Per Share
                                                  Income            Shares        Amounts
                                                 -----------------------------------------
<S>                                              <C>              <C>             <C>
Basic EPS:
 Income from continuing operations........        $ 5,921(1)      23,677(3)       $  .25
 Loss from discontinued operations........         (4,315)                          (.18)
                                                  -------                         ------
 Net income attributable to Class A Stock.        $ 1,606                         $  .07
                                                  =======                         ======

Effect of Dilutive Securities:
 Conversion of 4% and 6-1/2% Preferred
  Stocks..................................                         4,303
                                                                  ------

Diluted EPS:
 Income from continuing operations........        $ 6,079(2)                      $  .21
 Loss from discontinued operations........         (4,315)                          (.15)
                                                  -------                         ------
 Net income attributable to Class A Stock.        $ 1,764         27,980          $  .06
                                                  =======         ======          ======
</TABLE>

(1)   After deduction of Preferred Stock dividends of $351, $364 and $560,
      respectively.
(2)   Includes decrease in net income of $258, $363 and $402, respectively, due
      to dilution in equity in earnings of affiliate.
(3)   Includes 2,769 and 3,000 shares of Common Stock, respectively.


                                       48
<PAGE>

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


Note 10 - Income Taxes

<TABLE>
<CAPTION>
The components of current and deferred
income tax expense (benefit) are:                      1997        1996        1995
                                                   --------------------------------
<S>                                                <C>         <C>         <C>
Current:
 State and local...............................    $     66    $     65    $     65
 Federal.......................................       2,945         912       6,239
 Foreign.......................................       2,859         999       1,153
Deferred:
 State and local...............................         (95)       (214)         60
 Federal.......................................         716         (60)     (1,772)
 Foreign.......................................      (1,180)        197         122
                                                   --------    --------    --------
    Total......................................    $  5,311    $  1,899    $  5,867
                                                   ========    ========    ========

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

<CAPTION>
<S>                                                <C>         <C>         <C>
Equity in earnings of affiliates...............    $  1,218    $    404    $ (1,808)
Net operating loss carryforwards...............        (204)       (577)          -
Unrealized  (losses) gains.....................        (516)        336         (30)
Restructuring charge ..........................        (455)          -           -
Other..........................................        (602)       (240)        248
                                                   --------    --------    --------
   Total.......................................    $   (559)   $    (77)   $ (1,590)
                                                   ========    ========    ========

The domestic and foreign components of
income (loss) from continuing operations before
income taxes are:

<CAPTION>
<S>                                                <C>         <C>         <C>
Domestic.......................................    $   (363)   $ (1,894)   $  1,571
Foreign........................................      19,857      (3,567)     10,777
                                                   --------    --------    --------
   Total.......................................    $ 19,494    $ (5,461)   $ 12,348
                                                   ========    ========    ========

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

Federal income tax at 35%, 34% and 35%.........    $  6,823    $ (1,857)   $  4,321
Taxes on foreign income (below) in excess of
U.S. rate, net from tax credits................      (1,366)      4,040       1,516
Other..........................................        (146)       (284)         30
                                                   --------    --------    --------
Total effective tax: 27%, (35%),and 48%........    $  5,311    $  1,899    $  5,867
                                                   ========    ========    ========
</TABLE>

Other assets include approximately $3.6 million ($3.2 million in 1996) of
deferred tax assets which represent the tax benefit of the temporary differences
between the carrying values of the fixed assets in the financial statements and
their income tax bases and $2.5 million of income tax receivable recorded with
respect to the losses incurred in Pri Ha'emek (received in 1998). Accounts and
income taxes payable and accrued expenses include approximately $23.3 million
($22.2 million in 1996) of deferred tax liability provided on undistributed
earnings of affiliates.

Note 11 - 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>
                                                        1997        1996        1995
                                                        -----------------------------
<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        20.4
</TABLE>


                                       49
<PAGE>

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


<TABLE>
<CAPTION>
<S>                                                     <C>         <C>         <C>
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")        21.5        21.5        21.3
M.D.F. Industries Ltd.(c)....................            -           -          50
Moriah Hotels Ltd............................           46          46          46
Ophir Holdings Ltd.(d).......................           42.5        42.5        42.5
Orlite Industries (1959) Ltd. ("Orlite")
 (See Note 3(b)).............................            -          25.3        22.7
Ortek Limited (24.99% is also owned by a
 related party) .............................           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.(e)...............           50          50          50
U.D.S. - Ultimate Distribution Systems Ltd.
 (See Note 3(i)).............................            -          21.9        21.9
</TABLE>

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

<TABLE>
<CAPTION>
                                                     1997        1996        1995
                                                   --------------------------------
<S>                                                <C>         <C>         <C>
Revenues.....................................      $776,034    $788,169    $748,170
Gross profit.................................       204,992     184,533     163,962
  Net income.................................        53,083      36,346      23,439

Property and equipment.......................      $332,514    $356,901    $329,150
Other assets.................................       500,670     503,255     426,581
                                                   --------    --------    --------
  Total assets...............................      $833,184    $860,156    $755,731
                                                   ========    ========    ========

Total liabilities, including bank borrowings.      $516,627    $546,457    $457,408
                                                   ========    ========    ========
</TABLE>

(a) At December 31, 1997 and 1996, the Company had a note receivable from Bay
Heart Limited in the amount of $1 million and $5.8 million and recorded interest
income in the amount of $339 and $294 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, 1997 and 1996, the Company had a note receivable from CWI
in the amount of $.3 million and $.6 million and recorded interest income in the
amount of $49 and $69 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


                                       50
<PAGE>

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


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, 1997 and 1996, the Company had a non-interest bearing note
receivable from Trinet Venture Capital Ltd. in the amount of $3.6 million and
$3.3 million, respectively.

The carrying value of the Company's investments in shares of its publicly traded
affiliates and others (including the Company's investments through Ophir
Holdings Ltd.) at December 31, 1997, amounted to $85.3 million and had a market
value of $90 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 12 - Segment Information

Segment information presented below results primarily from operations in Israel.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                         1997            1996           1995
---------------------------------------------------------------------------------------
<S>                                          <C>            <C>            <C>
Revenues:
Finance................................      $ 16,738       $ 15,154       $  17,982
Real estate rental.....................         8,080         11,405           8,344(d)
Mattress manufacturing.................        12,129         10,892          10,174
Leisure-time...........................         1,667          1,671           1,514
Intercompany adjustments...............        (1,204)        (1,095)           (725)
                                             --------       --------        --------
     Total.............................      $ 37,410       $ 38,027        $ 37,289
                                             ========       ========        ========

Equity in Earnings (Losses) of
 Affiliates:
Finance................................       $15,228(c)     $ 2,278(c)      $ 1,343(b)
Real estate rental.....................          (882)(c)     (3,362)(c)      (1,455)(c)
Mattress manufacturing.................             -              -               -
Leisure-time...........................           472(a)      (2,336)(a)       1,779(a)
                                             --------       --------        --------
     Total.............................      $ 14,818        $(3,420)       $  1,667
                                             ========        =======        ========

<CAPTION>
YEAR ENDED DECEMBER 31,                         1997            1996           1995
---------------------------------------------------------------------------------------
Pretax Operating Income (Loss):
Finance................................      $ (1,199)      $ (12,076)      $  1,125
Real estate rental.....................         2,433           1,855(d)       3,803(d)
Mattress manufacturing.................          (264)         (1,516)           428
Leisure-time...........................          (400)           (608)          (730)
                                             --------        --------       --------
     Total.............................      $    570       $ (12,345)      $  4,626
                                             ========       =========       ========

Total Assets:
Finance................................      $227,356        $230,318       $257,985
Real estate rental.....................        48,869          62,745         61,804
Mattress manufacturing.................         8,809           8,520          7,912
Leisure-time...........................         2,831           3,262          4,949
Intercompany adjustments...............       (25,591)        (21,294)       (23,134)
                                             --------        --------       --------
</TABLE>


                                       51
<PAGE>

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


<TABLE>
<CAPTION>
<S>                                          <C>            <C>            <C>
     Total.............................      $262,274        $283,551       $309,516
                                             ========        ========       ========

Investments in Affiliates:
Finance................................      $      -        $      -       $      -
Real estate rental.....................        13,724(c)        8,902(c)       9,768(c)
Mattress manufacturing.................             -               -              -
Leisure-time...........................        34,638(a)       34,489(a)      37,108(a)
                                             --------        --------       --------
     Total.............................      $ 48,362        $ 43,391       $ 46,876
                                             ========        ========       ========

Capital Expenditures:
Finance................................       $   190         $    48       $     26
Real estate rental.....................         1,035           2,475         45,408
Mattress manufacturing.................           893             262            368
Leisure-time...........................            98              70            105
                                              -------        --------       --------
     Total.............................      $  2,216        $  2,855       $ 45,907
                                             ========        ========       ========

Depreciation and Amortization:
Finance................................      $  1,675        $  3,476       $  4,322
Real estate rental.....................           756           1,291            809
Mattress manufacturing.................           620             581            650
Leisure-time...........................           262             277            292
                                             --------        --------       --------
     Total.............................      $  3,313        $  5,625       $  6,073
                                             ========        ========       ========
</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, Israel, U.S. Virgin Islands and
            the United States (see Note 11).

      (b)   Operations in Cayman Islands and Israel.

      (c)   Operations in Israel.

      (d)   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 13 - Disclosures about Fair Value of Financial Instruments

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

(a)   Cash and Cash Equivalents

      For 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.


                                       52
<PAGE>

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


(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 14,
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.

                                          1997                     1996
                                   --------------------    --------------------
                                   Carrying      Fair      Carrying      Fair
                                    Amount       Value      Amount       Value
                                   --------      -----     --------      -----

Financial assets:

Cash and cash equivalents.....     $ 45,457    $ 45,457    $ 20,633    $ 20,633
Deposits, notes and loans
 receivable...................       46,176      44,480      57,041      56,752
Investments...................        7,453       7,453      20,829      20,829
                                   --------    --------    --------    --------
                                   $ 99,086    $ 97,390    $ 98,503    $ 98,214
                                   ========    ========    ========    ========

Financial liabilities:

Notes and loans payable.......     $ 23,207    $ 22,317    $ 44,543    $ 44,514
Debentures outstanding........       41,846      43,157      57,871      59,795
                                   --------    --------    --------    --------
                                   $ 65,053    $ 65,474    $102,414    $104,309
                                   ========    ========    ========    ========

Note 14 - 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 in 1998, $.3 million in 1999, $.4 million for the
years 2000-2002, and $8 million in the aggregate, thereafter, totalling $10.3
million. The leases expire in 1998, 2009 and 2038, respectively.

(b) For the years 1998 through 2002, the combined minimum lease receipts to be
received by the Company from rental properties are approximately $5.1 million in
1998 ($2.9 million from related parties); $4.4 million in 1999 ($2.2 million
from related parties); $3.8 million in 2000 ($1.7 million from related parties);
$2.4 million in 2001 ($.3 million from related parties); $2.2 million in 2002
($.1 from related parties); and $13 million in the aggregate, thereafter (all
from non-related parties), totalling $30.9 million ($7.2 million from related
parties).

(c) The Company has issued guarantees on bank loans to its investees and
subsidiaries totalling $13.2 million (includes $5 million of guarantees with
respect to M.D.F.).

      The Company's commitments to its investees amounted to $12.7 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


                                       53
<PAGE>

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


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 implementation of the separation agreement
will be carried out in stages up to the end of March 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 which is before its second and third reading in the Knesset.

      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
comments.

      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) Prior to November 1997 a lease of real property with a term of more than 10
years was required to be reported to the Israeli Appreciation Tax Authorities
and was subject to a land appreciation tax or an income tax and an acquisition
tax. The Israeli Tax Commissioner had taken the position that certain
arrangements for the lease of real property, including multiple leases, leases
with renewal options and leases or options to lease between affiliated
companies, which in the aggregate provided a term exceeding 10 years, were
subject to the above reporting and taxes.

      In November 1997, the law was amended whereby a lease of real property
with a term of up to 25 years is no longer subject to the above reporting and
taxes.

(f) In February 1995, Yakhin Hakal and its affiliates commenced a legal
proceeding in Tel Aviv District Court seeking to cause Etz Vanir Ltd. ("Etz
Vanir") and Yakhin Mataim Ltd. ("Yakhin Mataim") to redeem the perpetual
debentures owned by Ampal for approximately $.7 million and to require Ampal to
surrender all of its preferred shares of Etz Vanir and Yakhin Mataim for their
par value, on the alleged grounds that these 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. Though a hearing has been held no judgment in this case
has been rendered as of the date.

Note 15 - 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, which will result in the elimination of certain corporate
positions, will be completed in early 1998, and primarily relates to severance
and other employee related costs.

Note 16 - Subsequent Event

      On January 22, 1998 the Company completed its purchase of a one-third
interest in the assets of the shared networks operation of Motorola
Communications Israel, Ltd. ("Motorola Israel") for a purchase price of $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, 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.
Each loan has a term of 90 days and bears interest at a rate of LIBOR plus 1/2%.
The Company anticipates to replace the aforementioned short-terms loans with
long-term financing.

      A new wireless communications service provider ("Provider" or
"Corporation") one-third owned by the Company and two-thirds owned by Motorola
Israel will coordinate and operate in Israel the digital and analog
public-shared two-way radio services previously furnished by Motorola Israel.
The digital wireless communication service is based on Motorola's iDEN(TM)
integrated wireless communication technology, which is known as MIRS in Israel.


                                       54
<PAGE>

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


      The Company owns all of the authorized preferred shares of the Corporation
and Motorola Israel owns all of the authorized ordinary shares. Each share
issued by the Corporation will be entitled to one vote.

      To the extent of available after-tax profits, the Provider is required to
pay distributions or dividends to the Company equal to at least $3,800 for
fiscal year 2000 and $7,100 for each fiscal year thereafter so long as the
financial stability of the Provider will not be impaired. The Provider shall
endeavor to pay distributions or dividends in the following amounts: for fiscal
year 1998, $4,950, for fiscal year 1999, $10,725 and for fiscal year 2000 and
thereafter, $23,430 (inclusive of the required payments), which all holders of
an interest in the Provider shall share on a pro rata basis. To the extent that
any of the above distributions or dividends are not paid by the Provider, they
will accumulate. No dividends will be paid by the Corporation to Motorola Israel
until the Company has received all of its accumulated dividends. Any
distributions or dividends which are paid in excess of the above amounts for a
given fiscal year will similarly be paid pro rata to the Company and Motorola
Israel based on their shares in the Provider.

      Pursuant to the purchase agreement, Motorola Israel guaranteed that the
Company would receive from the Provider at least $3,800 for fiscal year 2000 and
$7,100 for each fiscal year between 2001 and 2005 inclusive, subject to an
obligation of the Company to repay such guarantee payments in amount equal to
the excess of the amount actually received by the Company from the Provider with
respect to any subsequent year over $7,500.

      The $110 million purchase price for the Company's one-third interest in
the Provider was based upon the Company's current valuation of the SNO and its
prospects. The purchase agreement provides that under specified circumstances
indicating that there has been an increase in the enterprise value of the
Corporation, the Company must pay Motorola Israel an additional amount (the
"Bonus"). The formula for the Bonus varies depending upon whether an initial
public offering of the Corporation's shares (an "IPO") has been consummated. If
an IPO is consummated prior to December 31, 2002, the Company must pay Motorola
Israel a Bonus based on an increase in the valuation of the Corporation for
purposes of the IPO. In no event will such Bonus payment exceed $33 million
multiplied by 1.16(n), 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 Company's preferred shares up to that
time have been paid, then the Company must pay Motorola Israel a Bonus if (A)
the present value of the actual after tax net income of the Corporation (as
reported by the Corporation's 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 the Corporation is more than $5 million) for fiscal years 1998 through 2002,
discounted at the rate of 13%, exceed (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.

      In March 1998, the Company transferred its interest in the Provider to a
limited partnership (the "Partnership"). A wholly-owned Israeli subsidiary of
the Company (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, 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 closing date
until the purchase date of the limited partnership interests).

      The related parties purchased their limited 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 will assume
their pro rata share of Ampal's long term financing.

      The Partnership is entitled to all of the Company's rights under the
purchase agreement and has assumed all of its obligations.


                                       55
<PAGE>

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, 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

Year Ended December 31, 1996
Revenues .................................   $  7,998    $ 14,690(1)    $  8,443(1)    $ 13,229(1)    $ 44,360
Net interest (expense) ...................       (247)       (416)          (429)        (1,115)        (2,207)
Manufacturing operations .................       (112)       (139)          (799)           (86)        (1,136)
(Loss) income from continuing operations .   $ (1,401)   $  2,953       $ (2,565)      $ (6,347)      $ (7,360)
(Loss) from discontinued operations ......     (1,501)     (1,074)           (60)          (257)        (2,892)
                                             --------    --------       --------       --------       --------
Net (loss) income ........................   $ (2,902)   $  1,879       $ (2,625)      $ (6,604)      $(10,252)
                                             ========    ========       ========       ========       ========
Basic EPS:
(Loss) earnings per Class A share:
(Loss) earnings from continuing operations   $   (.06)   $    .13       $   (.12)      $   (.28)(2)   $   (.33)
 (Loss) from discontinued operations .....       (.06)       (.05)            --           (.01)          (.12)
                                             --------    --------       --------       --------       --------
(Loss) earnings per Class A share ........   $   (.12)   $    .08       $   (.12)      $   (.29)      $   (.45)
                                             ========    ========       ========       ========       ========
Diluted EPS:
 (Loss) earnings per Class A share:
  (Loss) earnings from continuing
   operations ............................   $   (.05)   $    .10       $   (.10)      $   (.23)      $   (.28)
  (Loss) from discontinued
   operations ............................       (.06)       (.03)            --           (.01)          (.10)
                                             --------    --------       --------       --------       --------
(Loss) earnings per Class A share ........   $   (.11)   $    .07       $   (.10)      $   (.24)      $   (.38)
                                             ========    ========       ========       ========       ========
</TABLE>

(1)   Restated to reclassify the loss from impairment of investment.
(2)   After deduction of preferred stock dividends of $351 and $364,
      respectively.


                                       56
<PAGE>

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:

Name                                 Position
----                                 --------

Daniel Steinmetz(5)................  Chairman of the Board of Directors and
                                     Director
Raz Steinmetz(1)(5)................  Director and Chairman of the Executive
                                     Committee
Yehoshua Gleitman(1)(5)............  Chief Executive Officer
Lawrence Lefkowitz(1)*.............  President and Director
Alan L. Schaffer**.................  Vice President-Finance and Treasurer
Shlomo Meichor*** .................  Vice President-Finance and Treasurer
Alla Kanter........................  Vice President-Accounting and Controller
Isaiah Halivni.....................  Vice President-Legal and Secretary
Miri Lent Sharir...................  Assistant Vice President-Israel Operations
Arie Abend(2)(3)...................  Director
Michael Arnon(4)...................  Director
Benzion Benbassat(5)...............  Director
Yaacov Elinav(1)...................  Director
Kenneth L. Henderson(2)(3).........  Director
Irwin Hochberg.....................  Director
Hillel Peled(4)....................  Director
Shimon Ravid.......................  Director
Evelyn Sommer(2)(3)(4).............  Director
Michael W. Sonnenfeldt.............  Director

----------

*     Mr. Lefkowitz resigned as President and Director of Ampal on March 26,
      1998.

**    Mr. Schaffer resigned as Vice President-Finance and Treasurer of Ampal
      effective April 1, 1998.

***   Mr. Meichor will assume 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.

(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. Ms. Sommer is the Chairwoman 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 on Option Plan." Mr. Peled is the Chairman of the Stock Option
      Committee.

(5)   Member of the MIRS Financing Committee, which was established to approve
      any financing required in connection with the purchase from Motorola
      Israel. Dr. Gleitman is a member of the MIRS Financing Committee ex
      officio. See "Significant Recent Developments Since Beginning Of Last
      Fiscal Year - Formation of a New Communication Provider in Israel."


                                       57
<PAGE>

      In 1997, the Board of Directors met five times and did not act by written
consent; the Executive Committee met three times and acted by written consent
thirteen 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 one time; and the Stock Option Committee met twice and acted by written
consent one time. Ampal does not have a nominating committee or compensation
committee. Other than Ms. Sommer, Mr. Sonnenfeldt and Mr. Harry B. Henshel (who
was a director of Ampal until May 28, 1997), all directors attended more than
75% of the aggregate of (1) the total number of Board of Directors meetings held
during the period in 1997 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 1997 (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 the term of office of each such director and
officer.

      Daniel Steinmetz, 60, 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, 34, 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
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, 48, 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
Director General of the Israeli Ministry of Industry and Trade and was Chief
Scientist at the Ministry of Industry and Trade from January 1993 until February
1997. Prior to his tenure with Ministry of Industry and Trade, Mr. Gleitman was
Director General of AIMS Limited, a trading company.

      Lawrence Lefkowitz, 60, was President and Chief Executive Officer of Ampal
from November 1990 until May 1997. In May 1997, the By-laws of Ampal were
changed to reassign the Chief Executive Officer role from the President to a new
position of Chief Executive Officer; Mr. Lefkowitz continued as President,
responsible for Ampal's activities in North America until his resignation as
President and Director on March 26, 1998. Since August 1990 at the request of,
and pursuant to the terms of his employment agreement with, Ampal, he has been
Counsel to Hapoalim and rendered legal services to its United States branches.

      Alan L. Schaffer, 55, was Vice President-Finance and Treasurer of
Ampal from August 1990 until his resignation effective April 1, 1998.

      Shlomo Meichor, 40, will assume 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, 40, has been Vice President-Accounting of Ampal since
September 1995 and Controller of Ampal since August 1990.

      Isaiah Halivni, 31, has been Vice President-Legal and Secretary of Ampal
since February 1997. From November 1993 until January 1997, he was an associate
at Kronish, Lieb, Weiner & Hellman LLP. From October 1992 until May 1993, he was
an attorney employed by the law firm of Yigal Arnon & Co., a Tel Aviv law firm.

      Miri Lent Sharir, 41, has been Assistant Vice President-Israel Operations
of Ampal since July 1988 and has been employed by Ampal (Israel) for more than
five years. She also serves as a director of Carmel Container Systems Limited
(of which Ampal directly and indirectly owned 20.7% as of December 31, 1997).

      Arie Abend, 60, has been a Joint Managing Director of Hapoalim and
Regional Manager, Western Hemisphere of Hapoalim since June 1994. From March
1991 until May 1994, he was a Senior Executive Vice President of Hapoalim. In
1984, 1985 and 1991, he served as a director of Ampal. He became a director
again in 1994.


                                       58
<PAGE>

      Michael Arnon, 73, 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, 60, has been the President and Chief Executive Officer
of D.R.B. Investments Ltd., an investment company, for more than the past five
years.

      Yaacov Elinav, 53, 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, 43, 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.

      Irwin Hochberg, 69, has been a Senior Partner and President of Bloom
Hochberg & Co., P.C., which provides accounting, auditing and tax service,
professional and consulting services to commercial and individual clients, for
more than five years. He became a director of Ampal in 1994.

      Hillel Peled, 50, 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 Ampel in June 1996.

      Shimon Ravid, 61, 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.

      Evelyn Sommer, 59, has been President of Women's International Zionist
Organization-USA, and a representative of Women's International Zionist
Organization to the United Nations for more than five years, has been Chairman,
American Section of the World Jewish Congress for more than five years and has
been Chairman, North American Section of the World Jewish Congress since January
1996. She became a director of Ampal in 1982.

      Michael W. Sonnenfeldt, 42, is the founder of Emmes & Company LLC, a
private real estate investment group headquartered in New York City and has been
its Managing Director for more than the past five years. He became a director of
Ampal in June 1996.

             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 1997, Ampal's officers,
directors and greater than 10% beneficial owners complied with all applicable
Section 16(a) filing requirements.


                                       59
<PAGE>

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, 1997, 1996 and
1995.

                                       Annual Compensation
                            -------------------------------------
    Name and Principal                               Other Annual  All Other
         Position           Year   Salary    Bonus   Compensation  Compensation
         --------           ----   ------    -----   ------------  ------------

Yehoshua Gleitman(1)        1997   $179,756             $23,843(2)  $ 37,444(3)
 (Chief Executive Officer)

Lawrence Lefkowitz(4)       1997    221,324               8,720(2)    33,203(5)
 (President)                1996    220,851               8,123(2)    28,800(6)
                            1995    212,351  $16,335      9,088(2)    26,055(7)

Moshe Mor(8)                1997    155,707                          224,126(9)
 (Executive Vice            1996    193,751                           35,834(10)
  President)                1995    145,880   37,185                  27,267(11)

Alan L. Schaffer(12)        1997    147,950                           19,378(13)
 (Vice President-Finance    1996    147,950                           19,527(14)
  and Treasurer)            1995    142,250   10,942                  16,467(15)

Miri Lent Sharir            1997    132,418                           29,842(16)
 (Assistant Vice            1996    120,272                           27,363(17)
  President-Israel          1995    111,767   29,880                  24,932(18)
  Operations)

Raz Steinmetz(19)           1997    100,342               5,599(2)    21,219(20)
 (Chairman of the
  Executive Committee)

----------

(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 and his salary is $240,000 (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
      Gleitman's employment up to a maximum of nine months.

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

(3)   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.

(4)   By agreement between Ampal and Hapoalim, beginning in January 1996,
      Hapoalim reimburses Ampal $120,000 per year for Mr. Lefkowitz's legal
      services. (Previously, Hapoalim had reimbursed Ampal $100,000 per annum
      for Mr. Lefkowitz's services.) Mr. Lefkowitz is employed pursuant to an
      employment agreement, expiring September 12, 1998, providing for the
      payment of salary which shall not be less than the salary paid to him in
      1992 ($191,961) (plus benefits and the use of a company car) and which
      salary is subject to annual review. Mr. Lefkowitz resigned as President
      and Director of Ampal on March 26, 1998 but will continue as an employee
      of Ampal until September 1998.

(5)   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


                                       60
<PAGE>

      Savings Plan of $4,500. See "Other Benefits" below for a description of
      such plans.

(6)   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.

(7)   Comprised of Ampal's contribution pursuant to: (i) Ampal's Pension Plan of
      $15,562; (ii) Ampal's Supplementary Executive Retirement Plan of $9,993
      and (iii) Ampal's Savings Plan of $500.

(8)   Mr. Mor resigned as Executive Vice President of Ampal, effective April 12,
      1997, though he continued to be an employee of Ampal (Israel) until
      January 18, 1998.

(9)   Comprised of (i) a one-time severance payment of $195,713 made by Ampal
      (Israel) in January, 1998; (ii) an Ampal (Israel) contribution to its
      pension plan in the amount of $18,444 and (iii) an Ampal (Israel)
      contribution to its education fund in the amount of $9,969.

(10)  Comprised of Ampal (Israel)'s contribution to (i) Ampal (Israel)'s pension
      plan of $23,364 and (ii) Ampal (Israel)'s education fund of $12,470.

(11)  Comprised of Ampal (Israel)'s contribution to (i) Ampal (Israel)'s pension
      plan of $17,982 and (ii) Ampal (Israel)'s education fund of $9,285.

(12)  Mr. Schaffer resigned as Vice President-Finance and Treasurer of Ampal
      effective April 1, 1998.

(13)  Comprised of Ampal's contribution pursuant to (i) Ampal's Pension Plan of
      $14,963 and (ii) to Ampal's Savings Plan of $4,415.

(14)  Comprised of Ampal's contribution pursuant to (i) Ampal's pension plan of
      $15,117 and (ii) Ampal's Savings Plan of $4,410.

(15)  Comprised of Ampal's contribution pursuant to: (i) Ampal's Pension Plan of
      $15,562; (ii) Ampal's Supplementary Executive Retirement Plan of $405 and
      (iii) Ampal's Savings Plan of $500.

(16)  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.

(17)  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.

(18)  Comprised of Ampal (Israel)'s contribution to (i) Ampal (Israel)'s pension
      plan of $17,463 and (ii) Ampal (Israel)'s education fund of $7,469.

(19)  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
      receives a salary of $100,000 (payable in Shekels) per annum (plus
      benefits). His agreement can be terminated by either party upon thirty
      days notice.

(20)  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.

      Mr. Schlomo Meichor will become Vice President - Finance and Treasurer of
Ampal, effective April 1, 1998. Pursuant to an employment agreement, dated March
5, 1998, Mr. Meichor will receive 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.


                                       61
<PAGE>

                        FISCAL YEAR-END OPTION VALUES(1)

                                           Number of Securities Underlying
                                            Unexercised Options at Fiscal
                                                    Year-End(2)
                                           -------------------------------
Name                                       Exercisable       Unexercisable
----                                       -----------       -------------

Yehoshua Gleitman....................                0                   0
Lawrence Lefkowitz(3)................           16,000                   0
Moshe Mor(4).........................           15,150                   6
Alan L. Schaffer(5)..................           13,000                   0
Miri Lent............................           11,500                   0
Raz Steinmetz........................                0                   0

----------

(1)   No options were granted to or exercised by any named executive officer
      during 1997, and no options were in-the-money as of December 31, 1997.

(2)   This represents the total number of shares of Class A Stock subject to
      stock options held by the named executive officer at December 31, 1997.

(3)   Mr. Lefkowitz's options will expire in December 1998 (three months after
      the expiration of his employment agreement).

(4)   Mr. Mor's options will, because of the termination of his employment with
      the Company, expire in April 1998.

(5)   Mr. Schaffer's options will, because of his resignation from Ampal, expire
      in July 1998.

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

No. Of Options                Exercise Price                Term
--------------------------------------------------------------------------------

200,000                       $6.75                         4.25 years
300,000                       $8                            7 years
500,000                       $10                           10 years

One-fourth of all such options will vest immediately and the remaining options
will vest at a rate of one-sixteenth of the total number of options every three
months for four years. The 200,000 shares with an exercise price of $6.75 will
expire four years and three months after the Effective Date; the 300,000 shares
with an exercise price of $8 will expire on the seventh anniversary of the
Effective Date; and the 500,000 shares with an exercise price of $10 will expire
on the tenth anniversary of the Effective Date. All options that have not vested
prior to Dr. Gleitman no longer being 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.

      Subject to shareholders' approval, Dr. Gleitman will also be 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 will
vest and terminate in blocks of 50,000. The first block will vest and become
exercisable on the Effective Date and terminate on the day prior to the sixth
month anniversary of the Effective Date. The second block will vest and become
exercisable on September 1, 1998 and terminate on February 28, 1999. The third
block will vest and becomes exercisable on March 1, 1999 and terminate on August
30, 1999. The fourth block will vest and become exercisable on September 1, 1999
and terminate on February 28, 2000. The above purchase rights may only be
exercised as long as Dr. Gleitman is employee of Ampal. Any purchase rights not
exercised during the periods referred to above shall terminate and shall no
longer be exercisable. Dr. Gleitman may exercise his purchase rights by
delivering a promissory note due and payable in thirty months, in a principal
amount equal to up to 75% of the purchase price, together with payment in full
of the purchase price not covered by such note. The interest rate on such notes
shall equal the effective rate of interest incurred by Ampal from time to time
for unsecured recourse borrowings. All shares of Class A Stock purchased on
exercise of the purchase right or on exercise of the options or otherwise
acquired by Dr. Gleitman will be pledged as collateral security for such notes.
No shares of Class A Stock acquired by Dr. Gleitman on its exercise of any
purchase rights may be sold for a period of two years from the date of
acquisition.


                                       62
<PAGE>

      Ampal will retain a right of first refusal for ten years in connection
with the resale of any shares of Class A Stock that Dr. Gleitman acquired
through the exercise of options or any purchase rights, other than in respect of
(i) certain transfers to family members and certain affiliates and (ii) bona
fide open market sales.

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 worked, as provided in the following table:

                                                                Vested
        Years of Service                                      Percentage
        ----------------                                      ----------

        less than 2 years...................................       0%
        2 but less than 3 years.............................      20%
        3 but less than 4 years.............................      40%
        4 but less than 5 years.............................      60%
        5 but less than 6 years.............................      80%
        6 or more years.....................................     100%

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

      Ampal maintains a savings plan (the "Savings Plan") for its eligible
employees pursuant to Section 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code"). Eligible employees are all employees of Ampal except
non-resident aliens, night-shift employees and employees represented by a
collective bargaining unit. Participation by employees in the Savings Plan is
voluntary. Participating employees may direct that a specific percentage of
their annual compensation (up to 15%) be contributed to a self-directed 401(k)
savings account. The amount which any employee could contribute to his or her
401(k) savings account in 1997, 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 and 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 worked, as
provided in the following table:


                                       63
<PAGE>

                                                            Vested
        Years of Service                                  Percentage
        ----------------                                  ----------

        less than 2 years...............................       0%
        2 but less than 3 years.........................      20%
        3 but less than 4 years.........................      40%
        4 but less than 5 years.........................      60%
        5 but less than 6 years.........................      80%
        6 or more years.................................     100%

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

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

Compensation of Directors

      Directors of Ampal (other than Mr. Lefkowitz and 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. Peled (Chairman), Mr. Arnon and Ms. Sommer.

      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.

      To the extent that a grant of options results in the aggregate fair market
value of


                                       64
<PAGE>

the shares of Class A Stock with respect to which ISOs are exercisable for the
first time by an optionee during any calendar year exceeding $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 tax withholding 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 110,900 shares of Class A Stock remain outstanding (not including
options granted to a former employee which will expire in April, 1998 or options
granted to former directors which will expire in May 1998). The remaining
options expired upon the termination of the option holder's employment with the
Company. No stock options were granted under the Stock Option Plan during 1997.

           COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

      During 1997, members of the Executive Committee of the Board of Directors
which functions as the compensation committee of Ampal included: Mr. Lawrence
Lefkowitz, President of Ampal (who resigned as Director and President of Ampal
on March 26, 1998); Mr. Yaacov Elinav, Senior Deputy Managing Director of
Hapoalim; and Mr. Raz Steinmetz (Chairman). Mr. Stanley I. Batkin was a member
of the Executive Committee until May 28, 1997. For a description of business
transactions between Ampal and Hapoalim, see "Certain Relationships and Related
Transactions."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSHIP AND MANAGEMENT

                         PRINCIPAL SHAREHOLDERS OF AMPAL

      The following table sets forth information as of March 20, 1998 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 20, 1998, there were outstanding 23,849,043 (not including treasury
shares) shares of Class A Stock of Ampal. In addition, there were outstanding
958,407 non-voting shares of 6 1/2% Preferred Stock (each convertible into 3
shares of Class A Stock) and 178,377 non-voting shares of 4% Preferred Stock
(each convertible into 5 shares of Class A Stock).

Security Ownership of Certain Beneficial Owners

                                                    Amount and Nature
Name and Address                                      of Beneficial      Percent
of Beneficial Owner                Title of Class       Ownership       of Class
-------------------                --------------       ---------       --------

Daniel Steinmetz.................
Rebar Financial Corp.
c/o Icaza, Gonzalez-Ruiz
& Aleman (BVI) Ltd.
Wickhams Cay, Road Town,
Tortola, British Virgin Islands    Class A Stock     10,115,952 shs.      42.4%

Raz Steinmetz....................
Rebar Financial Corp.
c/o Icaza, Gonzalez-Ruiz
& Aleman (BVI) Ltd.
Wickhams Cay, Road Town,
Tortola, British Virgin Islands    Class A Stock     10,115,952 shs.      42.4%


                                       65
<PAGE>

Rebar Financial Corp.............
c/o Icaza, Gonzalez-Ruiz
& Aleman (BVI) Ltd.
Wickhams Cay, Road Town,
Tortola, British Virgin Islands    Class A Stock     10,115,952 shs.      42.4%

Bank Hapoalim B.M................
50 Rothschild Blvd.
Tel Aviv, Israel                   Class A Stock      6,258,639 shs.      25.8%

----------

(1)   As reported by Mr. Daniel Steinmetz, Mr. Raz Steinmetz and Rebar on
      Amendment to Form 4, dated March 11, 1998, filed with the SEC. Consists of
      10,115,952 shares of Class A Stock held directly by Rebar. 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 20, 1998 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:

<TABLE>
<CAPTION>
                                                                          Percent of
                                                 Amount and Nature of     Outstanding
                                                 Beneficial Ownership      Shares of
Name                                               of Class A Stock      Class A Stock
----                                               ----------------      -------------
<S>                                                      <C>                     <C>
Michael Arnon..................................               7,500(1)               *
Irwin Hochberg.................................               3,000(2)               *
Lawrence Lefkowitz.............................              48,375(3)               *
Miri Lent Sharir...............................              16,630(4)               *
Alan L. Schaffer...............................              13,000(5)               *
Evelyn Sommer..................................               5,000(1)               *
Daniel Steinmetz...............................          10,115,952(6)           42.4%
Raz Steinmetz..................................          10,115,952(6)           42.4%
All Directors and Executive Officers as a Group          10,209,457(7)           42.7%
</TABLE>

----------

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

(1)   Consists of options to purchase shares of Class A Stock which are
      currently exercisable.

(2)   Includes 1,000 shares of Class A Stock held of record by Mr. Hochberg's
      wife.

(3)   Includes 23,100 shares of Class A Stock held by a trust under an estate as
      to which Mr. Lefkowitz is co-personal representative and options to
      purchase 16,000 shares of Class A Stock which are currently exercisable.
      Mr. Lefkowitz resigned as President and Director of Ampal effective March
      26, 1998 and will continue to be an employee of Ampal until the expiration
      of his employment agreement in September 1998. His options will expire in
      December 1998.


                                       66
<PAGE>

(4)   Includes options to purchase 11,500 shares of Class A Stock which are
      currently exercisable.

(5)   Consists of options to purchase 13,000 Shares of Class A Stock which,
      because of Mr. Schaffers resignation from Ampal, will expire in July 1998.

(6)   Attributable to 10,115,952 shares of Class A Stock held directly by Rebar.
      See "Certain Beneficial Owners."

(7)   Includes options to purchase 53,000 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 1997, the largest amount of such indebtedness outstanding at any one time
was $32,375,000 and interest expense thereon was $2,540,000. 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 1997 was
$62,958,000 and interest income thereon was $4,543,000. As of December 31, 1997,
the amount of borrowings and deposits from Hapoalim and its subsidiaries was
$18,207,000 and the amount of loans to and deposits with Hapoalim and its
subsidiaries was $62,958,000. Ampal is the beneficiary of a $2 million committed
line of credit from Hapoalim which expires in October 1998. Borrowings under
this line of credit bear interest at a variable rate of interest equal to LIBOR
plus 0.5%. 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 purchase of a one-third interest in the
assets of the shared networks operation of Motorola Israel, the Company borrowed
$35 million from Hapoalim. The loan has a term of 90 days and bears interest at
a rate of LIBOR plus 0.5%. In addition, the Company borrowed $2 million from
Hapoalim pursuant to the line of credit described above.

      In March 1998, the Company sold portions of its interest in the shared
networks operations of Motorola Israel to, among others, (i) an entity owned by
Daniel Steinmetz and Raz Steinmetz (directors of Ampal and the controlling
persons of Ampal's principal shareholder), (ii) Hapoalim, and (iii) an entity
owned by Dr. Yehoshua Gleitman, Ampal's Chief Executive Officer. The related
parties purchased their limited interests 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 shared networks operations. It is intended
that the loans to Dr. Gleitman will mirror the terms of the long-term financing
that Ampal anticipates obtaining in connection with the original purchase.
Should the long-term financing terms differ from what Ampal currently
anticipates, the terms of Dr. Gleitman's loans will be adjusted accordingly. See
"Significant Recent Developments Since Beginning of Last Fiscal Year - Formation
of a New Communications Service Provider in Israel."

      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 1997, Ampal's total payments to Hapoalim in
connection with this lease totalled $155,000. (Pursuant to the sublease
agreement, Ampal was entitled to one month's free rent in 1997.)

      The Company leases office space in various locations in the United States
and 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 1997 of approximately $2,953,000. 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. In 1997, Hapoalim
reimbursed Ampal $120,000 for the services of Mr. Lefkowitz under the
arrangement.

      Pursuant to a Letter Agreement, dated as of March 1, 1997, among, Ampal,
Ampal Realty


                                       67
<PAGE>

Corporation and Emmes Asset Management Corp., Emmes provides general asset
management and property advisory services with respect to the building located
at 800 Second Avenue. As compensation for such services, Ampal Realty pays Emmes
a base fee equal to $60,000 per annum (of which $50,000 was paid in 1997). Emmes
is also entitled to a sales incentive fee for assisting in sales of condominium
units equal to $1.50 per rentable square foot sold and an incentive leasing fee
equal to $.50 per annum per rentable square foot up to a maximum of $5.00 per
rentable square foot. Ampal Realty entered into one lease in 1997 for 19,000
square feet. As a result, Emmes is entitled to an additional $9,500 per year of
which $4,750 was earned in 1997 (since the lease was signed in the middle of the
year). In addition, 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. On January 20, 1998,
Ampal issued 300 shares to Mr. Davidoff, as custodian, and anticipates issuing
additional shares in April, 1998 and each April, thereafter. Mr. Davidoff is a
Vice President of Emmes. Emmes is a wholly-owned subsidiary of Emmes & Company
LLC. Mr. Michael Sonnenfeldt, a director of Ampal, is the founder and managing
director of Emmes & Company LLC.


                                       68
<PAGE>

                                     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:

<TABLE>
<CAPTION>
                                                                                   Page
                                                                                Reference*
                                                                                ----------
  <S>                                                                           <C>
  (1) Financial Statements and Supplementary Data

       Ampal-American Israel Corporation and Subsidiaries

              Report of Independent Public Accountants........................      34
              Consolidated Statements of Income for the years ended December
                31, 1997, 1996 and 1995.......................................      35
              Consolidated Balance Sheets as at December 31, 1997 and 1996....      36
              Consolidated Statements of Cash Flows for the years ended
                December 31, 1997, 1996 and 1995..............................      38
              Consolidated Statements of Changes in Shareholders' Equity for
                the years ended December 31, 1997, 1996 and 1995..............      40
              Notes to Consolidated Financial Statements......................      42

  Supplementary Data:

              Selected quarterly financial data for the years ended December
                31, 1997 and 1996.............................................      56

  (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, 1997 ......      74

  (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..................................      75
      Consolidated Balance Sheets as at December 31, 1997, and 1996...........      77
      Consolidated Statements of Income for the years ended December 31, 1997,
        1996 and 1995.........................................................      79
      Consolidated Statements of Shareholders' Equity for the years ended
        December 31, 1997, 1996 and 1995......................................      80
      Consolidated Statements of Cash Flows for the years ended December 31,
        1997, 1996 and 1995...................................................      81
      Notes to Consolidated Financial Statements..............................      85

     Ophir Holdings Ltd.
      Report of Independent Auditors..........................................      129
      Consolidated Balance Sheets as at December 31, 1997 and 1996............      131
      Consolidated Statements of Income for the years ended December 31, 1997,
        1996 and 1995.........................................................      133
      Consolidated Statements of Changes in Shareholders' Equity for the years
        ended December 31, 1997, 1996 and 1995................................      134
      Consolidated Statements of Cash Flows for the years ended December 31,
        1997, 1996 and 1995...................................................      135
      Notes to Consolidated Financial Statements..............................      137

  (iii) Reports of Other Certified Public Accountants filed pursuant to Rule
</TABLE>


                                       69
<PAGE>

<TABLE>
<CAPTION>
                                                                                   Page
                                                                                Reference*
                                                                                ----------
  <S>                                                                           <C>
        2-05 of Regulation S-X:

        AM-HAL Ltd............................................................      177
        Ampal Engineering (1994) Ltd..........................................      178
        Ampal Enterprises Ltd.................................................      180
        Ampal Financial Services Ltd..........................................      181
        Ampal Holdings (1991) Ltd.............................................      182
        Ampal Industries (Israel) Ltd.........................................      184
        Ampal (Israel) Ltd....................................................      185
        Ampal Properties Ltd..................................................      187
        Bay Heart Ltd. .......................................................      189
        Carmel Container Systems Ltd. ........................................      192
        Coral World International Limited.....................................      193
        Country Club Kfar Saba Limited........................................      194
        Epsilon Investment House Ltd..........................................      196
        Hod Hasharon Sport Center (1992) Limited Partnership..................      197
        Mivnat Holdings Ltd...................................................      199
        Moriah Hotels Ltd. ...................................................      201
        Nir Ltd...............................................................      202
        Orlite Industries (1959) Ltd..........................................      204
        Ortek Ltd. ...........................................................      205
        Paradise Industries Ltd. (U.S. Dollars)...............................      206
        Pri Ha'emek (Canned and Frozen Food) 88 Ltd...........................      207
        Red Sea Marineland Holding (1973) Ltd.................................      209
        Red Sea Underwater Observatory Ltd....................................      211
        Renaissance Investment Co. Ltd........................................      213
        Shmey-Bar Real Estate 1993 Ltd........................................      214
        Shmey-Bar (T.H.) 1993 Ltd.............................................      216
        Teledata Communications Ltd...........................................      218
        Trinet Investment in High-Tech Ltd....................................      219
        Trinet Venture Capital Ltd. ..........................................      220
        U.D.S.-Ultimate Distribution Systems Ltd..............................      222

(3) List of Exhibits

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

<S>                                                                              <C>
       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 2 a 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,
</TABLE>


                                       70
<PAGE>

<TABLE>
<CAPTION>
                                                                                    Page
                                                                                 Reference*
                                                                                 ----------
<S>                                                                              <C>
                  1997, and incorporated herein by reference. File No. 0-5380).
         3b.      By-Laws of Ampal-American Israel Corporation as amended, dated
                  September 10, 1997. (Filed as Exhibit 3b to Form 10-Q, for the
                  quarter ended September 30, 1997 and incorporated herein by
                  reference. File No. 0-538).

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.     Warrant Agreement between Ampal-American Israel Corporation
                  and Chemical Bank, dated as of February 1, 1994. (Filed as
                  Exhibit 10e to Form 10-K for the fiscal year ended December
                  31, 1993 and incorporated herein by reference. File No.
                  0-538).
         10d.     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).
         10e.     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).
         10f.     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).
         10g.     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).
         10h.     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).
         10i.     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
</TABLE>


                                       71
<PAGE>

<TABLE>
<CAPTION>
                                                                                   Page
                                                                                Reference*
                                                                                ----------
<S>                                                                             <C>
                  Amendment No. 1 to Registration Statement No. 33-51023 and
                  incorporated herein by reference).
         10j.     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).
         10k.     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).
         10l.     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).
         10m.     Agreement of Sale, dated December 12, 1996, between Ampal
                  Realty Corporation and The Government of Israel. (Filed as
                  Exhibit 10p. to Form 10-K for the fiscal year ended December
                  31, 1996 and incorporated herein by reference. File No.
                  0-538)........................................................
         10n.     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 of this Form
                  10-K).........................................................
         10o.     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).
         10p.     Form of Stock Option and Stock Purchase Agreement between
                  Ampal-American Israel Corporation and Yehoshua Gleitman.         E-2
         10q.     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).
         10r.     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).
         10s.     Agreement, dated as of March 1, 1997, among Emmes Asset
                  Management Corp., Ampal-American Israel Corporation and Ampal
                  Realty Corporation.                                              E-13

Exhibit 11 - Computation of Earnings Per Share ...............................     E-17

Exhibit 12 - Statement re Computation of Ratios...............................     E-18

Exhibit 21 - Subsidiaries of the Registrant...................................     E-19

Exhibit 23 - Consents of Auditors:

      AM-HAL Ltd..............................................................     E-20
      Ampal-American Israel Corporation.......................................     E-21
      Ampal Engineering (1994) Ltd............................................     E-22
      Ampal Enterprises Ltd...................................................     E-23
      Ampal Financial Services Ltd............................................     E-24
      Ampal Holding (1991) Ltd................................................     E-25
      Ampal Industries (Israel) Ltd...........................................     E-26
      Ampal (Israel) Ltd......................................................     E-27
      Ampal Properties Ltd....................................................     E-28
      Bay Heart, Ltd..........................................................     E-29
      Carmel Container Systems Ltd............................................     E-31
      Coral World International Ltd...........................................     E-32
</TABLE>


                                       72
<PAGE>

<TABLE>
<CAPTION>
                                                                                   Page
                                                                                Reference*
                                                                                ----------
<S>                                                                             <C>
      Country Club Kfar Saba Limited..........................................     E-33
      Epsilon Investment House Ltd............................................     E-34
      Granite Hacarmel Investments Limited....................................     E-35
      Hod Hasharon Sport Center (1992) Ltd. Partnership.......................     E-36
      Mivnat Holdings Ltd.....................................................     E-37
      Moriah Hotels Ltd.......................................................     E-38
      Nir Ltd.................................................................     E-39
      Ophir Holdings Ltd......................................................     E-40
      Orlite Industries (1959) Ltd............................................     E-41
      Ortek Ltd...............................................................     E-42
      Paradise Industries Ltd.................................................     E-43
      Pri Ha'emek (Canned and Frozen Food) 88 Ltd.............................     E-44
      Red Sea Marineland Holding (1973) Ltd...................................     E-45
      Red Sea Underwater Observatory Ltd......................................     E-47
      Renaissance Investment Co. Ltd..........................................     E-49
      Shmey-Bar Real Estate 1993 Ltd..........................................     E-50
      Shmey-Bar (T.H.) 1993 Ltd...............................................     E-51
      Teledata Communications Ltd.............................................     E-52
      Trinet Investment in High-Tech Ltd......................................     E-53
      Trinet Venture Capital Ltd..............................................     E-54
      U.D.S.-Ultimate Distribution Systems Ltd................................     E-55

Exhibit 24 - Powers of Attorney...............................................     E-56
</TABLE>

      (b) No reports on Form 8-K were filed during the last quarter of 1997. A
Current Report on Form 8-K was filed by the Registrant on February 5, 1998,
which described on Item 2 event, the acquisition from Motorola Communications
Israel Ltd. of the assets of its shared networks operations. See "Significant
Recent Developments Since Beginning of Last Fiscal Year - Formation Of A New
Communications Service Provider in Israel".

*     Page reference preceeded by the letter "E" refer to the separately bound
      volumes of exhibits.


                                       73
<PAGE>

                        Representative Rates of Exchange
               Between the U.S. Dollar and the New Israeli Shekel
                   For the Three Years Ended December 31, 1997

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

                                                        1997   1996  1995
                                                        ----   ----  ----
March 31..............................................  3.361  3.111 2.968
June 30...............................................  3.587  3.203 2.951
September 30..........................................  3.497  3.220 2.995
December 31...........................................  3.536  3.251 3.135


                                       74
<PAGE>

[Somekh Chaikin Letterhead]

Tirat HaCarmel, March 11, 1998


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, 1997
and 1996, and the related consolidated statements of income, 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 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 3.6% of the total consolidated
assets as of December 31, 1997 and 1996, and whose revenues constitute 3%, 3%
and 2.7% of the total consolidated revenues for the years ended December 31,
1997, 1996 and 1995, 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.


                                       75
<PAGE>

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, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 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
28 to the financial statements.

Without qualifying our opinion, we would like to bring attention to Note 26 to
the financial statements regarding the Controller of Restrictive Trade
Practices' ruling of the existence of a restrictive arrangement in regard to the
refueling system for automobile fleets; the proposal to shorten agreements made
by a consolidated company with filing station operators and owners; and with
legislation proposed by the Ministry of Energy dealing with 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.


/s/ Somekh Chaikin


Certified Public Accountants (Israel)


                                       76
<PAGE>

             GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                     Adjusted to the Index of December 1997
                     --------------------------------------

                                                   N          December 31,
                                                   o   -------------------------
                                                   t        1997        1996
                                                   e        ----        ----
                                                   -   Adjusted NIS. (thousands)
                                                       -------------------------
Current assets
  Cash and cash equivalents                                  7,856      10,866
  Marketable securities                            4         4,355       5,201
  Trade receivables                                5       488,469     521,364
  Accounts receivable                              5        77,112     *34,411
  Inventories                                      6       269,104     320,189
                                                         ---------   ---------

                                                           846,896     892,031
                                                         ---------   ---------

Investments, long-term
  loans and debit balances
Subsidiaries, affiliated
  companies and others                             7       150,252    *141,588
Long-term loans                                    8        76,053      54,401
                                                         ---------   ---------

                                                           226,305     195,989
                                                         ---------   ---------

Fixed assets                                       9
  Cost                                                   1,376,921   1,321,335
  Less: Accumulated depreciation                           736,924     672,662
                                                         ---------   ---------
                                                           639,997     648,673
                                                         ---------   ---------

Intangible assets and
  deferred charges, net                           10        49,894      32,755
                                                         ---------   ---------

                                                         1,763,092   1,769,448
                                                         =========   =========


*     Reclassified

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


                                       77
<PAGE>

             GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                     Adjusted to the Index of December 1997
                     --------------------------------------

                                                   N          December 31,
                                                   O   -------------------------
                                                   t        1997        1996
                                                   e        ----        ----
                                                   -   Adjusted NIS. (thousands)
                                                       -------------------------

Current liabilities
  Credits from banks and others                    11     450,079      269,895
  Current portion of
    convertible debentures                         14      41,298       40,619
  Trade payables                                   12      46,179      191,737
  Accounts payable                                 13      90,432     *133,237
                                                        ---------    ---------

                                                          627,988      635,488
                                                        ---------    ---------

Long-term liabilities
  Long-term loans                                  14      89,696       67,925
  Debentures convertible into
    shares of the Company                          14     156,315      192,158
  Debentures convertible into
    shares of a subsidiary                         14          --        2,187
  Customers' deposits                              15      61,972       64,438
  Liabilities for employee rights
    upon retirement, net                           16      10,903        9,872
  Deferred taxes, net                              24          --        2,830
  Capital notes issued by
    a consolidated company                                    215          230
                                                        ---------    ---------

                                                          319,101      339,640
                                                        ---------    ---------

Minority interest                                          10,830       10,182
                                                        ---------    ---------

Collaterals, commitments and
  contingent liabilities                         25,26

Shareholders' equity                                      805,173      784,138
                                                        ---------    ---------

                                                        1,763,092    1,769,448
                                                        =========    =========


*     Reclassified


/s/ J. Rosen
---------------------------------
J. Rosen - Chairman of the Board


/s/ M. Mor
---------------------------------
M. Mor - Director


/s/ M. Erez
---------------------------------
M. Erez - Managing Director


Date: March 11, 1998.

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


                                       78
<PAGE>

              GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME

                     Adjusted to the Index of December 1997
                     --------------------------------------

                                     N            Year ended December 31,
                                     o    -------------------------------------
                                     t       1997        *1996         *1995
                                     e       ----         ----          ----
                                     -          Adjusted NIS, (thousands)
                                          -------------------------------------

Sales                                     3,089,715     3,110,105     2,886,250
Less: Government imposts                  1,249,931     1,206,001     1,003,082
                                          ---------     ---------     ---------

Net sales                                 1,839,784     1,904,104     1,883,168
Cost of sales                        19   1,429,737     1,492,467     1,498,100
                                          ---------     ---------     ---------

Gross profit                                410,047       411,637       385,068
                                          ---------     ---------     ---------

Selling and marketing expenses       20     259,516       254,981       219,493
General and administrative expenses  21      56,613        51,618        55,409
                                          ---------     ---------     ---------
                                            316,129       306,599       274,902
                                          ---------     ---------     ---------

Income and operations                        93,918       105,038       110,166
                                          ---------     ---------     ---------

Financing expenses, net              22     (23,895)      (19,782)      (11,787)
Other income, net                    23      13,515         7,933         2,862
                                          ---------     ---------     ---------

                                            (10,380)      (11,849)       (8,925)
                                          ---------     ---------     ---------

Income before taxes on income                83,538        93,189       101,241
Taxes on income                      24      32,410        38,164        42,567
                                          ---------     ---------     ---------

Income after taxes on income                 51,128        55,025        58,674
Company's share in income (loss)
  of affiliates, net                           (125)          712        (3,307)

Minority interest in
  consolidated subsidiaries                      87        (1,574)         (672)
                                          ---------     ---------     ---------

Net income for the year                      51,090        54,163        54,695
                                          =========     =========     =========

Earnings per ordinary share
  (in adjusted NIS.):

  Primary                                      0.42          0.44          0.45
                                               ====          ====          ====

  Fully diluted                                0.39          0.30          0.29
                                               ====          ====          ====


*     Reclassified.

The accompany note are an integral part of the financial statements.


                                       79
<PAGE>

              GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                     Adjusted to the Index of December 1997
                     --------------------------------------

                                      Capital    Premium    Retained     Total
                                                            Earnings
                                      -------    -------    -------     -------
                                              Adjusted NIS. (thousands)
                                      -----------------------------------------
Balance as of January, 1995           215,539    122,495    396,030     734,064

Changes in 1995:

Net income for the year                    --         --     54,695      54,695

Dividend paid, net(*)                      --         --    (28,859)    (28,859)
                                      -------    -------    -------     -------

Balance as at December 31, 1995       215,539    122,495    421,866     759,900

Changes in 1996:

Net income for the year                    --         --     54,163      54,163

Dividend paid                              --         --    (29,925)    (29,925)
                                      -------    -------    -------     -------

Balance as at December 31, 1996       215,539    122,495    446,104     784,138

Changes in 1997:

Net income for the year                    --         --     51,090      51,090

Dividend paid                              --         --    (30,055)    (30,055)
                                      -------    -------    -------     -------

Balance as of at December 31, 1997    215,539    122,495    467,139     805,173
                                      =======    =======    =======     =======

(*)   Net of erosion of dividend declared in previous year.

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


                                       80
<PAGE>

              GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                     Adjusted to the Index of December 1997
                     --------------------------------------

                                                     Year ended December 31,
                                               ---------------------------------
                                                 1997        1996         1995
                                               --------    --------     -------
                                                    Adjusted NIS. (thousands)
                                               ---------------------------------
Cash flows from operating activities
Net income                                       51,090      54,163      54,695
Adjustments to reconcile net income
  to operating cash flows (A):                  (74,366)     13,982     114,319
                                               --------    --------     -------

Net cash (used for) provided by
  operating activities                          (23,276)     68,145     169,014
                                               --------    --------     -------

Cash flows from investing activities
Acquisition of fixed assets                     (97,054)    (94,455)    (90,888)
Proceeds from sale of fixed assets               31,482       3,642       1,881
Dividend received from affiliates                    --       1,560          --
Long-term loans granted (1)                     (21,953)    (14,617)     (3,651)
Collection of long-term loans                    14,127      10,881       7,372
Investment in intangible and
  deferred charges                              (19,477)    (15,380)     (5,956)
Investment in affiliated companies              (16,243)    (73,257)     (6,118)
Proceeds from redemption of
  compulsory government loan                        160         781         792
Proceeds from (investments in)
  marketable securities, net                      2,359      (4,101)      6,026
Proceeds from short-term deposit                     --          --      39,864
Investment in companies carried on
  the cost basis                                 (3,595)         --          --
Acquisition of shares in a subsidiary
  company                                            --      (1,735)         --
Repayment of capital notes of
  interested parties                                 --      11,849      33,157
Acquisition of initially
  consolidated companies (B)                         --         (39)          2
                                               --------    --------     -------

Net cash used for investing activities         (110,194)   (174,871)    (17,519)
                                               --------    --------     -------

                      C/F                      (133,470)   (106,726)    151,495
                                               ========    ========     =======


                                       81
<PAGE>

              GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                     Adjusted to the Index of December 1997
                     --------------------------------------

                                                     Year ended December 31,
                                               ---------------------------------
                                                 1997        1996        1995
                                               --------    --------    --------
                                                   Adjusted NIS. (thousands)
                                               ---------------------------------

                         B/F                   (133,470)   (106,726)   (151,495)
                                               --------    --------    --------

Cash flows from financing activities:

Dividend paid                                   (30,055)    (29,925)    (79,855)
Dividend paid to minority shareholders
  in a consolidated subsidiary                     (485)       (326)       (366)
Short-term credit from banks, net               122,595      90,984     (37,286)
Short-term loans from others, net                (8,123)     10,699      (6,376)
Long-term loans received                         86,923      64,432          --
Long-term loans repaid (2)                       (1,208)     (1,013)     (1,472)
Redemption of capital notes issued
  by a consolidated company                          --         (82)         --
Customers' deposits received                      2,535       2,225       2,038
Customers' deposits repaid                         (560)       (671)       (841)
Redemption of debentures                        (41,162)    (40,626)    (13,197)
                                               --------    --------    --------
Net cash provided by (used for)
  financing activities                          130,460      95,697    (137,355)
                                               --------    --------    --------
(Decrease) Increase in cash and
  cash equivalents                               (3,010)    (11,029)     14,140
Cash and cash equivalents at
  beginning of year                              10,866      21,895       7,755
                                               --------    --------    --------

Cash and cash equivalents at
  the end of year                                 7,856      10,866      21,895
                                               ========    ========    ========

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


                                       82
<PAGE>

              GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                     Adjusted to the Index of December 1997
                     --------------------------------------

                                                    Year ended December 31,
                                               ---------------------------------
                                                  1997       1996         1995
                                                -------    --------     --------
                                                    Adjusted NIS. (thousands)
                                               ---------------------------------
(A)
Adjustments to reconcile net
  income to operating cash flows:

Income and expenses not requiring cash flows:
Depreciation and amortization                    76,873      73,686      68,136
Deferred taxes, net                              (7,544)     (2,970)     (7,728)
Increase (Decrease) in liabilities for
  employee rights upon retirement,  net           1,473         977      (1,779)
Minority interest in (loss) income of
  consolidated subsidiaries                         (87)      1,574         672
Company's share in loss (less undistributed
  income) of affiliates, net                      3,012         942       5,318
Capital gains                                    (6,426)       (332)       (470)
Erosion of investments in capital notes, net       (385)       (184)       (487)
Erosion of long-term loans, debentures
  and capital notes issued                        5,000     (17,220)    (12,402)
Erosion of loans granted                            324       1,297         780
Increase in value of compulsory
  Government loan and securities, net            (1,504)     (1,023)       (227)
Erosion of customers' deposits                   (4,441)     (4,046)     (2,586)
Erosion of short-term deposit                        --          --      (1,328)
Write-off of investment in
  an affiliated company carried on cost basis     3,441          --          --
Write-off loan to an affiliated company           4,947          --       3,550

Changes in assets and liabilities:
(Increase) Decrease in trade and
  accounts receivable (1)(2)                     (3,060)   (144,042)     15,073
Decrease in inventories                          51,175      18,655      55,521
(Decrease) Increase in trade
  and accounts payable                         (197,164)     86,668      (7,724)
                                               --------      ------     -------

                                                 74,366      13,982     114,319
                                               ========      ======     =======

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


                                       83
<PAGE>

              GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                     Adjusted to the Index of December 1997
                     --------------------------------------

                                                       Year ended December 31,
                                                     ---------------------------
                                                     1997      1996        1995
                                                     ------   ------      ------
                                                     Adjusted NIS. (thousands)
                                                     ---------------------------
(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)                          671         28       (102)
Fixed assets, net                                    (197)        (6)      (801)
(Assets) long-term debt, net                         (404)        --        905
Reserve for the loss of the affiliated
  company as of the day of changeover
  to a consolidated company                            --         --        434
Goodwill created at acquisition                      (108)    (1,100)      (434)
Minority interest as of the
  acquisition date                                     38      1,039         --
                                                     ----     ------       ----

                                                       --        (39)         2
                                                     ====     ======       ====

Activities not requiring cash flow:

(1)   In the 1997, current receivables from customers were converted into
      long-term loans in the amount of NIS. 15,457 thousand (1966 - NIS. 29,566
      thousand, 1995 - NIS. 11,661 thousand).

(2)   In 1996, the redemption of a loan received from an affiliated company in
      the amount of NIS. 4,815 thousand was offset against a receivable from the
      affiliated company.


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


                                       84
<PAGE>

              GRANITE HACARMEL INVESTMENT 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
                  maintained their financial records on a current basis in
                  historical New Israel Shekels. In accordance with Opinions
                  issued by the Institute of Certified Public Accountants in
                  Israel, the consolidated financial statements are stated in
                  terms of December 1997 New Israel Shekels ("adjusted shekels")
                  which reflect a uniform purchasing power. Such shekel
                  statements are henceforth referred to as "adjusted
                  statements".

                  The comparative figures (including the monetary items) in the
                  adjusted statements - (balance sheets, statements of income,
                  statements of changes in shareholders' equity, statements of
                  cash flows) - are also stated in terms of December 1997
                  adjusted shekels.

            2.    The adjusted values presented in the adjusted statements do
                  not necessarily reflect realizable value or current economic
                  value, but rather the original historical value or the value
                  including excess of cost over net asset value related to
                  specific assets, adjusted for the changes in the general
                  purchasing power of Israel currency, to permit comparison of
                  the data on a uniform basis.

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

      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 1997, based on the Consumer Price Index published
            by the Central Bureau of Statistics ("Index"), on January 15, 1998
            (see Note 2.G.1.)

      C.    Principals 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.


                                       85
<PAGE>

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

                  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.

            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, which cannot be independently
                        calculated, is derived from the other items in the
                        statement of income. The item includes, inter alia,
                        amounts required for the adjustment of various items in
                        the statement of income in respect of the inflationary
                        component of the financing included therein.

                  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.


                                       86
<PAGE>

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.

      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.


                                       87
<PAGE>

NOTE 2 - SIGNIFICANT REPORTING AND ACCOUNTING POLICIES (CONTINUED)

      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.

            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


                                       88
<PAGE>

NOTE 2 -  SIGNIFICANT REPORTING AND ACCOUNTING POLICIES (CONTINUED)

            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.

      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:

<TABLE>
<CAPTION>
                                             December 31,               Changes in %
                                        ----------------------    ---------------------
                                        1997     1996    1995     1997     1996    1995
                                        ----     ----    ----     ----     ----    ----
                  <S>                   <C>      <C>     <C>       <C>     <C>      <C>
                  Index                 153.1    143.1   129.4     7.0     10.6     8.1
                  Exchange rate of
                    the U.S. dollar     3.536    3.251   3.135     8.8      3.7     3.9
</TABLE>

            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.


                                       89
<PAGE>

NOTE 2 - SIGNIFICANT REPORTING AND ACCOUNTING POLICIES (CONTINUED)

      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.).

            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
                        Accoutants 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 construction project is
                  recorded in accordance with the Opinion No. 6 of the Institute
                  of Certified Public Accountants in Israel.


                                       90
<PAGE>

NOTE 2 - SIGNIFICANT REPORTING AND ACCOUNTING POLICIES (CONTINUED)

      L.    Provision for linkage increments on customers' deposits

            The wholly-owned subsidiary, Supergas Israel Gas Distribution
            Company Ltd. ("Supergas") 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.

      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.    Fair value of financial instruments

            There is no significant difference between the fair value of the
            financial instruments of the Company and their value as stated in
            the balance sheet, except for debentures convertible into shares
            (see note 14).


                                       91
<PAGE>

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

      A.    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.    In addition to the recommendations of the committee previously
                  appointed by the Minister of Energy and Infrastructure, the
                  Minister of Energy has announced his intention to change the
                  policy regarding the holdings of Emergency inventories of
                  crude oil and refined products and to separate them from the
                  operating inventories of the oil companies. To date, ownership
                  of Emergency inventories of heavy fuel oil held at the Israel
                  Electric Corporation has been transferred to the Israel
                  Electric Corporation. For the period which commenced November
                  1996 and ended February 1997, the requirement to hold
                  Emergency inventories of heavy fuel oil was graduelly
                  cancelled. 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 tender to
                  determine the party who will hold the Emergency inventories in
                  warehouses specially designated by the Ministry of National
                  Infrastructure. Subsequent to the balance sheet date, the
                  Ministry of National Infrastructure published a tender for
                  holding of part of the crude oil Emergency inventories which
                  are currently held by the major oil marketing companies.

                  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.


                                       92
<PAGE>

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
                  Minister of the Treasury and the Minister of National
                  Infrastructures 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. 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.

            6.    On September 1, 1995 the Government published a decree the
                  purpose of which was to regulate infrastructure rates in the
                  fuel economy Decree for the Stability of Products and Services
                  (Temporary Order) (Infrastructure Rates in the Fuel Economy)
                  1995. The decree establishes, inter alia, the various types of
                  infrastructure services and the maximum prices allowed, as
                  well as the method for updating the tariffs.

      B.    Supergas

                  In January 1995, a convention was signed between the Ministry
                  of Energy and several gas companies, among them Supergas,
                  establishing standards of service to their clients. In May
                  1995, price controls in effect on the price of gas were
                  lifted. Concurrently, the companies who are parties to the
                  convention undertook not to deviate, when setting their prices
                  to the consumer, from an agreed upon formula for an interim
                  period ending on December 31, 1996.

            2.    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. 5.6 million, net, which has been netted against
                  "Government imposts" in statements of income.


                                       93
<PAGE>

NOTE 4 -  MARKETABLE SECURITIES

            Consist of:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                           -------------------------
                                                                1997         1996
                                                                ----         ----
                                                           Adjusted NIS. (thousands)
                                                           -------------------------
            <S>                                                 <C>          <C>
            Shares                                              4,295        5,090
            Convertible debentures                                 60          111
                                                                -----         ----
                                                                4,355        5,201
                                                                =====         ====
</TABLE>

NOTE 5 -    TRADE RECEIVABLES AND ACCOUNTS RECEIVABLE

<TABLE>
<CAPTION>
                                                                 December 31,
                                                           -------------------------
                                                               1997         1996
                                                               ----         ----
                                                           Adjusted NIS. (thousands)
                                                           -------------------------

      A.    Trade receivables

            <S>                                                 <C>          <C>
            Consist of:
            Customers - open accounts                         393,561      429,278
            Checks and notes receivable                        44,257       40,288
            Credit card companies                              53,147       52,239
            Short-term loans and current portion
             of long-term loans granted                         9,754       11,075
            Less - provision for doubtful receivables(*)      (12,250)     (11,516)
                                                              -------      -------
                                                              488,469      521,364
                                                              =======      =======
<CAPTION>

      B.    Accounts receivable

            <S>                                                 <C>          <C>
            Consist of:
            Fuel Authority                                     10,976           -
            Government Institutions                               335          232
            Income receivable                                  26,764        7,791
            Employees                                             825          864
            Prepaid expenses                                   10,156        6,445
            Income tax receivable                               8,783        4,932
            Future tax benefits, net(**)                        6,066        4,670
            Compulsory Government loan                             -           169
            Others                                             13,207        9,308
                                                              -------      -------
                                                               77,112       34,411
                                                              =======      =======
</TABLE>

            (*)   See note 2.I.

            (**) See note 24.


                                       94
<PAGE>

NOTE 6 - INVENTORIES

            Consist of:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                           -------------------------
                                                                 1997         1996
                                                                 ----         ----
                                                           Adjusted NIS. (thousands)
                                                           -------------------------
            <S>                                               <C>          <C>
            Crude oil and raw materials                        48,695       56,929
            Finished products                                 211,145      253,563
            Materials and supplies                              9,264        9,697
                                                              -------      -------
                                                              269,104      320,189
                                                              =======      =======
</TABLE>


NOTE 7 - SUBSIDIARIES, AFFILIATED COMPANIES AND OTHERS

<TABLE>
<CAPTION>
                                                                 December 31,
                                                           -------------------------
                                                              1997          *1996
                                                              ----          ----
                                                           Adjusted NIS. (thousands)
                                                           -------------------------
            <S>                                            <C>            <C>
            Affiliated companies:
            Share in equity                                 32,341          23,871
            Goodwill and excess cost attributed, net        88,352          82,397
            Less:  accumulated amortization                 (4,715)         (4,175)
                                                           -------         -------
            Book value (1)(3)                              115,978         102,093
            Long-term loans, net (3)                         7,047          11,946
            Capital note and capital reserve, net
             of provision for loss (2)                       7,419           7,895
                                                           -------         -------
                                                           130,444         121,934
            Others - cost less amortization (4)             19,808          19,654
                                                           -------         -------
                                                           150,252         141,588
                                                           =======         =======

<CAPTION>
                                                                 December 31,
                                                           -------------------------
                                                               1997         *1996
                                                               ----         ----
                                                           Adjusted NIS. (thousands)
                                                           -------------------------
            (1)  Cost of shares including retained
                  earning as of December 31, 1991            6,763           6,763
                 Changes, beginning 1.1.92:
                 Cost of shares acquired (3)               117,247         101,404
                 Retained earnings (**)                     (8,398)         (6,440)
                 Changes in capital reserves                   366             366
                                                           -------         -------
                 Book value (***)                          115,978         102,093
                                                           =======         =======

            (**) Dividend received in the current year       3,287           3,214
                                                           =======         =======
           (***) Including securities quoted
                  on the Tel-Aviv Exchange:
                 Book value                                 80,199              -
                                                           =======         =======
                 Market value                               38,992              -
                                                           =======         =======
</TABLE>

            *  Reclassified


                                       95
<PAGE>

NOTE 7 -  SUBSIDIARIES, AFFILIATED COMPANIES AND OTHERS (CONTINUED)

      (2)   Capital note is unsecured and non-negotiable, linked to the Index,
            bears no interest and matures in the year 2001.

      (3)   A.    The loans granted by a subsidiary to the affiliated company
                  Otzem Promotion and Investments (1991) Ltd. ("Otzem") are
                  mostly index linked and partly index linked bearing interest
                  at the rate of 5.5% p.a. The date of maturity is subject to
                  the financial capabilities of Otzem.

            B.    In the current year the Company through its subsidiary
                  companies invested in various other companies. The main
                  investment was in 10% of the share capital of Orpak Industries
                  (1983) Ltd. at a cost of NIS. 9,098 thousand.

      (4) See note 23.(3)a.

      (5) See also Note 3.A.5.

NOTE 8 - LONG-TERM LOANS

      a.    Consist of:

                                                            December 31,
                                                      -------------------------
                                                         1997            1996
                                                         ----            ----
                                                      Adjusted NIS. (thousands)
                                                      -------------------------

          Loans to customers                           85,674          62,965
          Loans to employees                              133             124
                                                       ------          ------
                                                       85,807          63,089

          Less: current portion                         9,754           8,688
                                                       ------          ------
                                                       76,053          54,401
                                                       ======          ======
          The years of maturity of the loans:

          First year - current portion                  9,754           8,688
          Second year                                  11,609          10,623
          Third year                                   15,691           6,868
          Fourth year                                   5,039           3,832
          Fifth year and thereafter and
           without maturity date                       43,714          33,078
                                                       ------          ------
                                                       85,807          63,089
                                                       ======          ======


                                       96
<PAGE>

NOTE 8 - LONG-TERM LOANS (CONTINUED)

      b.    Breakdown of loans by level of borrowers' balances:

<TABLE>
<CAPTION>
                                 December 31, 1997           December 31, 1996
          Borrowers'             -----------------           -----------------
          balances               Number of   Total           Number of   Total
          (NIS. thousands)       loans     NIS.thousands     loans     NIS.thousands
          ----------------       -----     -------------     -----     -------------
          <S>                     <C>       <C>               <C>       <C>
          Less than 100           131        5,987             99        5,206
          100 - 500                25        7,428             35        8,462
          500 - 1,000              11        7,602             10        8,071
          Above 1,000              27       64,790             15       41,350
                                  ---       ------            ---       ------
                                  194       85,807            159       63,089
                                  ===       ======            ===       ======
</TABLE>

      c.    Linkage terms and interest rates:

                                            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)
                                          -------------------------
          Loans to:
           Customers         349   2,796   41,532  30,243  5,443  5,311   85,674
           Employees           -       -      133       -      -      -      133
                            ----   -----   ------  ------  -----  -----   ------
                             349   2,796   41,665  30,243  5,443  5,311   85,807
                            ====   =====   ======  ======  =====  =====

          Less: current
                 portion                                                   9,754
                                                                          ------

                                                                          76,053
                                                                          ======

                                            December 31, 1996
                            ----------------------------------------------------
                             Unlinked        Linked to      Linked to     Total
                                               index        foreign
                                                            currency
                            ------------    ------------    ----------    ------
          Interest rates:    0%   10-20%    0-4%   4-10%    0%     5-9%
                                          Adjusted NIS. (thousands)
                                          -------------------------
          Loans to:
           Customers       2,177   4,373   26,365   22,241  2,570  5,239  62,965
           Employees           -       -      124       -      -      -      124
                            ----   -----   ------  ------  -----  -----   ------
                           2,177   4,373   26,489   22,241  2,570  5,239  63,089
                           =====   =====   ======   ======  =====  =====
          Less: current
                 portion                                                   8,688
                                                                          ------
                                                                          54,401
                                                                          ======

      d.    Regarding credit risks see note 25.E.


                                       97
<PAGE>

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                510,585    697,578    48,219    64,953   1,321,335
          Additions                33,736     50,704     5,948     8,320      98,708
          Disposals           **  (28,504)    (5,496)   (6,186)   (2,936)    (43,122)
                                  -------    -------    ------    ------  ----------

          Balance at end of year  515,817    742,786    47,981    70,337  *1,376,921
                                  -------    -------    ------    ------  ----------

          Accumulated depreciation
          Balance at beginning
           of year                142,923    460,890    28,960    39,889     672,662
          Depreciation charged     13,432     47,830     5,991     4,896      72,149
          Depreciation in
           respect of disposals       (62)    (1,195)   (4,655)   (1,975)     (7,887)
                                  -------    -------    ------    ------  ----------

          Balance at end of year  156,293    507,525    30,296    42,810     736,924
                                  -------    -------    ------    ------  ----------

          Depreciated balance as
           of December 31, 1997   359,524    235,261    17,685    27,527     639,997
                                  =======    =======    ======    ======  ==========
          Depreciated balance as
           of December 31, 1996   367,662    236,688    19,259    25,064     648,673
                                  =======    =======    ======    ======  ==========
</TABLE>

          (*)   Net of investment grants in the amount of NIS. 14,778
                thousand.

          (**)  See note 23.

      b.    Land and buildings include buildings on lease-hold lands, the cost
            of which is NIS. 202,600 thousand, for various original periods of
            49 - 98 years, ending in the years 1998 - 2072. Land and buildings
            at a cost of NIS. 205,440 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
            arranged.

      c.    Commitments and contingent liabilities - See note 25.


                                       98
<PAGE>

NOTE 10 - INTANGIBLE ASSETS AND DEFERRED CHARGES, NET

          Consist of:

                                                       Balance to be amortized
                                                         as of  December 31,
                                                       -------------------------
                                                           1997         1996
                                                           ----         ----
                                                       Adjusted NIS. (thousands)
                                                       -------------------------
          Intangible assets:

          Deferred rent                                    26,237       19,585
          Goodwill in consolidated
           subsidiaries (1)                                 6,454        4,607
          Others                                           10,958        5,175
                                                           ------       ------
                                                           43,649       29,367
          Deferred charges:

          Expenses incurred in the issuance
           of debentures by the Company (2)                 3,980        5,622
          Expenses incurred in the issuance
           of debentures by a consolidated
           subsidiary (2)                                      73          106
                                                           ------       ------
                                                           47,702       35,095
          Less: Deferred credit in a
                consolidated subsidiary (1)                 1,552        2,340
                                                           ------       ------

                                                           46,150       32,755
          Long-term future tax benefits (see note 24)       3,744           -
                                                           ------       ------
                                                           49,894       32,755
                                                           ======       ======

      (1)   For amortization see note 2.B.2

      (2)   For amortization see note 2.F.


                                       99
<PAGE>

NOTE 11 - CREDITS FROM BANKS AND OTHERS

          Linkage terms and interest rates:

<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                      1,558         -             -        1,558
          Short-term loans              347,152         -         32,885     380,037
          Current portion of
           long-term loans                   20     65,308           580      65,908
                                        -------     ------        ------     -------
          Total credits from banks      348,730     65,308        33,465     447,503
          Credits from others
           (related party)                   -       2,576            -        2,576
                                        -------     ------        ------     -------
                                        348,730     67,884        33,465     450,079
                                        =======     ======        ======     =======

<CAPTION>
                                                     December 31, 1996
                                       ---------------------------------------------
                                       Unlinked     linked      Linked to     Total
                                                     to         foreign
                                                    Index       currency
                                       ----------  -------      --------      -----
          Interest rates:              14.3-20%      4.8%       6.4-7.5%
                                       ----------  -------      --------
                                                 Adjusted NIS. (thousands)
                                       ---------------------------------------------
          <S>                           <C>         <C>           <C>        <C>
          Overdrafts                     2,484         -              -       2,484
          Short-term loans             238,561         -          17,391    255,952
          Current portion of
           long-term loans                  -        601             159        760
                                       -------       ---          ------    -------
          Total credits from banks     241,045       601          17,550    259,196
          Credit from others
          (related party)               10,699        -               -      10,699
                                       -------       ---          ------    -------
                                       251,744       601          17,550    269,895
                                       =======       ===          ======    =======
</TABLE>

NOTE 12 - TRADE PAYABLES

      The liabilities represent open amounts and include NIS. 2,381 thousand
      (1996 - NIS. 2,652 thousand) balances of related parties.


                                      100
<PAGE>

NOTE 13 - ACCOUNTS PAYABLE

                                                    December 31,  December 31,
                                                    ------------  ------------
                                                        1997           1996
                                                        ----           ----
                                                    Adjusted NIS. (thousands)
                                                    -------------------------
          Fuel Authority                                  -          44,640
          Liabilities to employees and
           other salary related liabilities           22,685         21,703
          Institutions                                36,234         39,763
          Accrued expenses                            19,308          9,874
          Others                                      12,205         17,257
                                                     -------        -------
                                                      90,432        133,237
                                                     =======        =======

NOTE 14 - LONG-TERM LIABILITIES

      A.    Long-term loans

                                           Rate of    December 31,  December 31,
                                           interest       1997           1996
                                              %       Adjusted NIS. (thousands)
                                           --------   -------------------------

         U.S. Dollar loans from banks      6.2-7.5       1,674            282
         Index linked loans from banks     4.6-4.8     150,812         64,795
         Customers' deposit - linked
          to the index                                   2,748          3,311
         Customers' deposit - linked
          to foreign currency                               61             58
         Unlinked loans from banks                          67             -
         Other loans - linked to the Index     -           242            239
                                                       -------         ------
                                                       155,604         68,685
         Less: current portion                          65,908            760
                                                       -------         ------
                                                        89,696         67,925
                                                       =======         ======

          Yearly installments:
                                                    December 31,  December 31,
                                                    ------------  ------------
                                                        1997           1996
                                                        ----           ----
                                                    Adjusted NIS. (thousands)
                                                    --------------------------

          First year - current portion                65,908            760
                                                     -------         ------
          Second year                                 85,561         64,283
          Third year                                     229             25
          Fourth year                                    206              9
          Fifth year                                     206             -
          No due date                                  3,494          3,608
                                                     -------         ------
                                                      89,696         67,925
                                                     -------         ------
                                                     155,604         68,685
                                                     =======         ======

   Accrued interest is included in "Accounts payable" in Current liabilities.


                                      101
<PAGE>

NOTE 14 - LONG-TERM LIABILITIES (CONTINUED)

      B.    Debentures convertible into shares of the Company

                                                    December 31,    December 31,
                                                    -------------  -------------
                                                       1997               1996
                                                     -------            -------
                                                    Adjusted NIS.    (thousands)
                                                    -------------  -------------
Debentures (Series 1)(*)                              52,906             62,435
Debentures (series 2)(**)                            142,488            168,155
                                                     -------            -------
                                                     195,394            230,590
Less - current position                               39,079             38,432
                                                     -------            -------
                                                     156,315            192,158
                                                     =======            =======
Yearly installments:

                                        December 31, 1997     December 31, 1996
                                       -------------------   -------------------
                                       Series 1   Series 2   Series 1   Series 2
                                       --------   --------   --------   --------
                                               Adjusted NIS. (thousands)
                                       -----------------------------------------

First year - current portion            10,581     28,498     10,406     28,026
                                        ------    -------     ------    -------
Second year                             10,581     28,498     10,406     28,026
Third year                              10,581     28,498     10,406     28,026
Fourth year                             10,581     28,497     10,406     28,026
Fifth year                              10,582     28,497     10,406     28,026
Subsequent years                            --         --     10,405     28,025
                                        ------    -------     ------    -------
                                        42,325    113,990     52,029    140,129
                                        ------    -------     ------    -------

                                        52,906    142,488     62,435    168,155
                                        ======    =======     ======    =======

(*)   Registered debentures (Series 1) NIS. 1. - par value each. Every NIS. 55.
      - par value of debentures are convertible into 10 ordinary shares of 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 5 equal annual installments on November 30 in
      each of the years commencing in 1998 and ending in 2002. As of the balance
      sheet date, there were 34,374,877 outstanding debentures. The market value
      of the debentures, as their price was quoted on the Stock Exchange, was
      NIS. 46,406 thousand at the balance sheet date.

(**)  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 5 equal annual installments on November 30 in each of the years
      commencing in 1998 and ending in 2002. As of the balance sheet date, there
      were 100,838,880 outstanding debentures. The market value of the
      debentures, as their price was quoted on the Stock Exchange, was NIS.
      133,107 thousand at the balance sheet date.

Accrued interest is included in "Accounts Payable" in current liabilities.

Regarding collaterals see Note 25.


                                      102
<PAGE>

NOTE 14 - LONG-TERM LIABILITIES (CONTINUED)

      C.    Debentures convertible into shares of a subsidiary

                                                     December 31,  December 31,
                                                     ------------  ------------
                                                        1997           1996
                                                        ----           ----
                                                     Adjusted NIS. (thousands)
                                                     --------------------------
      Debentures (Series 1)                            2,219           4,374
      Less - current portion                           2,219           2,187
                                                       -----           -----
                                                          --           2,187
                                                       =====           =====

      Yearly installments:

                                                     December 31,  December 31,
                                                     ------------  ------------
                                                        1997           1996
                                                        ----           ----
                                                     Adjusted NIS. (thousands)
                                                     --------------------------

      First year - current portion                     2,219           2,187
      Second year                                         --           2,187
                                                       -----           -----
                                                       2,219           4,374
                                                       =====           =====

      Pursuant to a public offering prospectus in May 1990, the subsidiary
      company, Vulcan Batteries Ltd. ("Vulcan"), issued 4,516,750 convertible
      debentures (Series 1) at par value. The debentures are linked to the Index
      for April 1990, and bear interest at an annual rate of 0.1%. From the date
      of issue until December 31, 1997, 755,560 debentures have been converted
      into shares. As of the balance sheet date there were 940,300 outstanding
      debentures (Series 1). The market value of the debentures, as their price
      was quoted on the Stock Exchange, was NIS. 2,078 thousand at the balance
      sheet date.

      The balance of debentures is payable on December 31, 1998 and is
      convertible at any time until December 26, 1998 into Vulcan's ordinary
      shares of NIS. 1. - par value at a conversion rate of 200% (1 share for
      every NIS. 2. - par value of debentures converted, subject to
      adjustments). The conversion of the debentures into shares may dilute
      Sonol's holding in Vulcan to 81.4% (instead of 83.9% as of the balance
      sheet date).

      Regarding collaterals - see Note 25.

D.    All the aforementioned debentures are listed for trading on the Tel-Aviv
      Stock Exchange.


                                      103
<PAGE>

NOTE 15 - CUSTOMERS' DEPOSITS

      a.    Customer deposits as of December 31, 1997 are calculated on the
            basis of the expected rate of price updating. Since the previous
            price update (January 1997), estimated prices of customer deposits
            increased by 5% (previous year - 4.1%). The deposits are calculated
            on the basis of their present value at the annual discount rate of
            1.75% (previous year - 1.25%).

      b.    Customers' deposits include NIS. 41,276 thousand (1996 - NIS. 44,770
            thousand) of linkage increments accrued on those deposits (Note
            2.L.).

NOTE 16 - LIABILITIES FOR EMPLOYEE RIGHTS UPON RETIREMENT, NET

                                                     December 31,   December 31,
                                                     -------------  ------------
                                                         1997          1996
                                                         ----          ----
                                                     Adjusted NIS.  (thousands)
                                                     -------------  ------------

      Provision for severance pay, net (a)               5,580         5,621
      Less:  deposits in approved funds (*)              1,711         1,539
                                                        ------         -----
                                                         3,869         4,082
      Provision for early retirement pension (**)(b)     5,118         3,892
      Provision for redemption of unutilized
      sick leave (c)                                     1,916         1,898
                                                        ------         -----

                                                        10,903         9,872
                                                        ======         =====

      (*)   The deposits can be withdrawn subject to law. Accrued income on the
            deposits is included in the statement of income.

      (**)  Excluding NIS. 1,756 thousand (1996 - NIS. 1,292 thousand) current
            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 time when the employee
            reaches retirement age and is measured as a fixed percentage of the
            amount due to the employee from the pension fund upon retirement.
            The rate of capitalization for computing the provision is 4.5% per
            annum.

      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 days. A provision based on an
            actuarial calculation has been made in the financial statements for
            covering the aforesaid liability. The actuarial calculation is
            based, inter alia, on a capitalization rate of 3%.


                                      104
<PAGE>

NOTE 17 - LINKAGE OF MONETARY BALANCES

<TABLE>
<CAPTION>
                                        December 31, 1997             December 31, 1996
                                  ---------------------------   ---------------------------
                                             Linked                       Linked
                                   Linked     to                 Linked      to
                                     to     foreign   Unlinked     to     foreign  Unlinked
                                   index    currency   (*)       index   currency    (*)
                                  -------   -------   -------   -------   -------   -------
                                  Adjusted to NIS. (thousands)  Adjusted to NIS. (thousands)
                                  ---------------------------   ---------------------------
<S>                               <C>       <C>       <C>       <C>       <C>       <C>
Assets:
  Cash and cash equivalent             --     4,224     3,632        --     7,083     3,783
  Marketable securities                60        --     4,295       111        --     5,090
  Trade receivables                 7,275    31,816   449,378     3,395    51,917   446,052
  Accounts receivable              16,021    12,844    32,025     5,828       922    16,546
  Investment in capital notes
  and loans                        12,502        --     1,964    19,841        --        --
  Long-term loans                  63,436     9,851     2,766    42,446     6,849     5,106
                                  -------   -------   -------   -------   -------   -------

                                   99,294    58,735   494,060    71,621    66,771   496,577
                                  =======   =======   =======   =======   =======   =======

Liabilities:
  Credits from banks and others        --    35,461   348,710        --    17,391   251,744
  Trade payables                    2,690     5,488    38,001     4,196   138,988    48,553
  Accounts payables                19,846     6,648    63,938    16,297    45,364    71,576
  Long-term liabilities
  (including current portion)
  and debentures                  156,021   197,129        67    72,719   230,930        --
  Customers' deposits (**)         61,972        --        --    64,438        --        --
  Capital notes                        --        --       215        --        --       230
                                  -------   -------   -------   -------   -------   -------

                                  240,529   244,726   450,931   157,650   432,673   372,103
                                  =======   =======   =======   =======   =======   =======
</TABLE>

(*)   Partly bearing interest.

(**)  Against the customers' deposit amount, 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. 185,991 thousand, Sonol holds fuel and refined products inventory
amounting to NIS. 218,238 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.

As of December 31, 1997 the balance from free dollar acquisitions from a bank
amounted to NIS. NIL thousand (1996 - NIS. 121,739 thousand) - see note 2.N.


                                      105
<PAGE>

NOTE 18 - CAPITAL

a.    Nominal values.

      Consist of:
                                             Authorized        Issued and Paid
                                             ----------        ---------------
                                           December 31,        December 31,
                                           --------------      ---------------
                                           1997      1996      1997       1996
                                           ----      ----      ----       ----
                                           NIS. (thousands)    NIS. (thousands)
                                          -----------------   ------------------
      225,000,000 Ordinary
        shares of NIS. 1. - each          225,000   225,000   122,674    122,674
                                          =======   =======   =======    =======

b.    Earnings per ordinary share

      1.    The net income used in computing earnings per NIS. 1. - par value of
            shares:

                                                    Year ended December 31,
                                                  ----------------------------
                                                   1997      1996       1995
                                                   ----      ----       ----
                                                    Adjusted NIS. (thousands)
                                                  ----------------------------
      The net income used in computing
        primary earnings per share                51,090    54,163     54,695
      Add (Deduct) - theoretical
        income (loss) deriving from:
      Exercise of options (series 2)(*)               --    10,094      6,045
      Conversion of debentures (series 1)          1,235    (2,401)    (1,535)
      Conversion of debentures (series 2)          5,510    (3,974)      (843)
                                                  ------    ------     ------

      Net income used in computing
      diluted earnings per share                  57,835    57,882     58,362
                                                  ======    ======     ======

      *     Expired on February 28, 1997. (The balance of stock options
            outstanding on December 31, 1996 and 1995 is 39,984,108 options).


                                      106
<PAGE>

NOTE 18 - CAPITAL (CONTINUED)

      2.    The par value of shares used in computing earnings per NIS. 1. - par
            value share:

                                                     Year ended December 31,
                                                  ---------------------------
                                                   1997      1996      1995
                                                   ----      ----      ----
                                                   Adjusted NIS. (thousands)
                                                  ---------------------------
            Share capital used in computing
              primary earnings per share          122,674   122,674   122,674
            Add - theoretical share capital
              that may derive from:
            Exercise of options (series 2)
              (see 1. above)                           --    39,984    39,984
            Conversion of debentures (series 1)     6,250     7,500     8,750
            Conversion of debentures (series 2)    20,168    24,201    28,235
                                                  -------   -------   -------
            The total shares used in computing
              diluted earnings per share          149,092   194,359   199,643
                                                  =======   =======   =======

      3.    For examining the probability of conversion or exercise of
            convertible securities, the present value was computed using a
            discount rate of (12.96 - 4.5%, 12.95 - 4.5%) for securities linked
            to the Index and 6% (12.96 - 5.5%, 12.95 - 6%) 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,
                                                              -------------------------------------
                                                                1997          1996          1995
                                                                ----          ----          ----
                                                                     Adjusted NIS. (thousands)
                                                              -------------------------------------
<S>                                                           <C>           <C>           <C>
            Materials used:
            ---------------
              Crude oil and refined petroleum products (*)    1,270,501     1,350,364     1,357,068
              Raw materials and auxiliary materials              36,092        39,049        44,286
              Finished luboil products purchased                  4,078         7,164         3,636
                                                              ---------     ---------     ---------
                                                              1,310,671     1,396,577     1,404,990
                                                              ---------     ---------     ---------

            Labor and sub-contract work
            ---------------------------
              Labor (including related expenses)                 13,445        14,073        13,701
              Sub-contract work
              (refining and terminal charges)                     3,479         3,365         7,070
                                                              ---------     ---------     ---------
                                                                 16,924        17,438        20,771
                                                              ---------     ---------     ---------
            Production costs                                     84,658        59,030        56,966
                                                              ---------     ---------     ---------
            Depreciation                                          3,819         3,563         3,459
                                                              ---------     ---------     ---------
            Batteries                                            13,665        15,859        11,914
                                                              ---------     ---------     ---------
            Total cost of sales                               1,429,737     1,492,467     1,498,100
                                                              =========     =========     =========
            Decrease in inventories                             (50,652)      (19,129)      (55,521)
                                                              =========     =========     =========
</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.


                                      107
<PAGE>

NOTE 20 - SELLING AND MARKETING EXPENSES

        Consist of:
                                                 Year ended December 31,
                                               ---------------------------
                                                1997      1996      1995
                                                ----      ----      ----
                                                 Adjusted NIS. (thousands)
                                               ---------------------------
            Salaries                            69,423    64,502    50,432
            Advertising and promotion           14,598    13,707    14,009
            Depreciation and amortization       65,006    62,668    57,368
            Maintenance of buildings, plants
              and filling stations              27,962    29,515    31,161
            Rent                                37,195    37,641    21,062
            Other expenses                      45,332    46,948    45,461
                                               -------   -------   -------

                                               259,516   254,981   219,493
                                               =======   =======   =======

NOTE 21 - GENERAL AND ADMINISTRATIVE EXPENSES

        Consist of:                                Year ended December 31,
                                                 --------------------------
                                                   1997     1996     1995
                                                   ----     ----     ----
                                                  Adjusted NIS. (thousands)
                                                 --------------------------
            Salaries                              29,464   29,148   30,073
            Depreciation and amortization          3,827    3,514    3,475
            Consulting, legal and audit            6,335    5,943    4,891
            Provision for doubtful accounts and
              Bad debts                            5,406    2,345    4,359
            Other expenses                        11,581   10,668   12,611
                                                  ------   ------   ------

                                                  56,613   51,618   55,409
                                                  ======   ======   ======

NOTE 22 - FINANCING INCOME (EXPENSES), NET

        Consist of:                                Year ended December 31,
                                               ------------------------------
                                                 1997       1996       1995
                                                 ----       ----       ----
                                                 Adjusted NIS. (thousands)
                                               ------------------------------
            From dollar linked debentures
              convertible to shares             (9,600)    10,904      4,805
            Long-term debt                       3,265      3,424      2,725
            Profit from securities, net          1,504      1,023        227
            Financing income from
              other receivables                 13,126     15,286     22,976
            Erosion of other monetary assets
              and liabilities, net             (32,190)   (50,419)   (42,520)
                                               -------    -------    -------
                                               (23,895)   (19,782)   (11,787)
                                               =======    =======    =======


                                      108
<PAGE>

NOTE 23 - OTHER INCOME, NET

            Consists of:                               Year ended December 31,
                                                    ----------------------------
                                                     1997       1996      1995
                                                     ----       ----      ----
                                                     Adjusted NIS. (thousands)
                                                    ----------------------------
            Rent                                     5,131      4,305     2,497
            Dividends received                         967        899     1,947
            Management fee                           6,538      2,037       803
            Income from construction project:
            Financial income (1)                     2,560         --        --
            Income from the project (2)              6,618         --        --
            Investment in and loan to affiliated
              companies written off (3)             (8,388)        --    (3,550)
            Others                                      89        692     1,165
                                                    ------      -----     -----
                                                    13,515      7,933     2,862
                                                    ======      =====     =====

      (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 current year an agreement was signed between a consolidated
            subsidiary together with its partners in the project known as
            "Rubinstein Towers" and Revadim (Properties) Ltd. (hereafter -
            Revadin) a subsidiary of Bank Hapoalim Ltd., according to which
            Revadim acquired a material part of the land and building in the
            project. The building is in its final stages and has been
            transferred to Revadim as of the balance sheet date (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.    Write-off of investment on cost basis in an affiliated company
                  (14%) in the amount of NIS. 3,441 thousand resulting from a
                  permanent decrease in value.

            b.    Provision for the decrease in value of loans granted to an
                  affiliated company (50%) in the amount of NIS. 4,947 thousand
                  (1996 - NIL) (1995 - NIS. 3,550 thousand).


                                      109
<PAGE>

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 a 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, 1996      (25,365)       1,912         7,183         15,140      (1,130)
            Changes in 1996        4,710       (1,617)          497           (620)      2,970
                                 -------        -----         -----         ------      ------
            Balance as of
            December 31, 1996    (20,655)         295         7,680         14,520       1,840

            Changes in 1997:
            Current*               5,384          405           964           (567)      6,186
            Regarding previous
            years                  1,784           --            --             --       1,784
                                 -------        -----         -----         ------      ------
            Balance as of
            December 31, 1997    (13,487)         700         8,644         13,953       9,810
                                 =======        =====         =====         ======      ======
</TABLE>

            *     Includes NIS. 426 thousand accumulated as of the date of
                  acquisition of an initially consolidated subsidiary.


                                      110
<PAGE>

NOTE 24 - TAXES ON INCOME (CONTINUED)

      The deferred taxes presented in the balance sheet as follows:

                                                     December 31,   December 31,
                                                     -------------  ------------
                                                        1997           1996
                                                        ----           ----
                                                     Adjusted NIS.   (thousands)
                                                     -------------  ------------

      Deferred taxes in long-term liabilities              --         (2,830)
      Future tax benefits in current assets             6,066          4,670
      Future tax benefits - long-term -in
      "intangible assets and deferred charges, net"     3,744             --
                                                        -----          -----

                                                        9,810          1,840
                                                        =====          =====

      c.    The provision for taxes on income in the statements of income
            consists of:

                                                  Year ended December 31,
                                           -------------------------------------
                                            1997           1996           1995
                                            ----           ----           ----
                                                  Adjusted NIS. (thousands)
                                           -------------------------------------
      Current taxes including
        inflationary erosion of
        advance tax payments               41,130         41,482         48,132
      Deferred taxes, net                  (7,544)        (2,970)       *(7,728)
                                           ------         ------         ------
                                           33,586         38,512         40,404

      Provisions (Overprovisions)
        pertaining to prior years          (1,176)          (348)        *2,163
                                           ------         ------         ------
                                           32,410         38,164         42,567
                                           ======         ======         ======

      (*)   These provisions were included in deferred taxes.

      d.    Final tax assessments

            Sprint has received final tax assessment through the tax year 1996,
            Supergas has received final tax assessment through the tax year 1994
            and Vulcan has received final tax assessments through the tax year
            1993. 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.


                                      111
<PAGE>

NOTE 24 - TAXES ON INCOME (CONTINUED)

      e.    Reconciliation between the theoretical tax on the reported income
            and the tax on income included in the statements of income.

                                                     Year ended December 31,
                                                 -------------------------------
                                                   1997        1996        1995
                                                   ----        ----        ----
      Statutory rate of tax                          36%         36%         37%
                                                   ====        ====        ====
                                                     Adjusted NIS. (thousands)
                                                 -------------------------------
      The theoretical tax at the
        applicable tax rate                      30,074      33,548      37,459
      Erosion of advanced tax payments              955       1,561       2,253
      Differences in definition of
        capital and assets for tax
        purposes and others, net                  2,557       3,403       2,855
      Overprovisions in respect of prior years   (1,176)       (348)         --
                                                 ------      ------      ------

                                                 32,410      38,164      42,567
                                                 ======      ======      ======


                                      112
<PAGE>

NOTE 25 - COLLATERALS, COMMITMENTS AND CONTINGENT LIABILITIES

      A.    Floating and fixed charges

<TABLE>
<CAPTION>
                                      December 31, 1997         Collateralized by
                                  -------------------------     -------------------------------
                                  Adjusted NIS. (thousands)
                                  -------------------------

<S>                                      <C>                    <C>
Short-term bank credits                    1,558                Floating charges on current
                                                                assets of the main subsidiaries

Short-term Loans from banks              380,037                Floating charges on current
                                                                assets of Sonol.

Accounts payable and credit                                     Floating charges on current
 balances including accrued                3,054                assets of Sonol.
 interest on short-term bank
 loans

Long-term bank loans                     152,553                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 guaranteeing 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 of a                                     Senior floating charge equal in
subsidiary                                 2,219                standing to all other senior
                                                                floating charges on all the
                                                                assets of Vulcan.

Convertible debentures                                          Floating charge subordinated
(Including interest)                     195,695                to other floating charges on
                                                                all the assets of the Company.
</TABLE>


                                      113
<PAGE>

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' management, based on the
                        opinions of legal counsels, the provisions made are
                        sufficient to cover the reasonable costs.

                  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. 5.5 million. In the opinion of
                        Sonol's legal counsel the claim's prospects (as far as
                        the monetary claims 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 has been confirmed
                        by the district court. The Fuel Authority has, in turn,
                        demanded that the fuel marketing companies pay for the
                        depreciation (to the extent payable) to the station
                        owners 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. 36.1 million and it
                        is the opinion of the company's legal counsel, that
                        there is no basis for these claims as far as they
                        related to Sonol.


                                      114
<PAGE>

NOTE 25 - COLLATERALS, COMMITMENT AND CONTINGENT LIABILITIES (CONTINUED)

                  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. 55
                        million pertain 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 found a sound defense against the claims.

                  e.    A filling station operator, who received operating
                        rights within the framework of the invalid arrangement
                        between the 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 state of
                        deliberations.

                  f.    In August 1994, Vulcan received a purchase tax
                        assessment in the amount of approximately NIS. 1.7
                        million, net of the income tax effect, representing tax
                        differences, linkage increments, interest and penalties
                        for the period of January 1990 through May 1994. In
                        September 1994, Vulcan submitted a protest against the
                        aforesaid assessment, which in July 1995, was dismissed.
                        In the Vulcan's opinion, based on the opinion of its
                        legal counsel, there is a reasonable chance that
                        Vulcan's position will be accepted by the Court. Should
                        Vulcan's protest be dismissed by the District Court,
                        Vulcan will also be assessed for tax differences for the
                        period from June 1994 and thereafter. No provision has
                        been provided in Vulcan's financial statements for the
                        above.

                  g.    A competing fuel company has filed a claim in the
                        district court requesting a ruling that all of Sonol's
                        agreements with filling stations are restrictive trade
                        agreements and therefore, invalid. The court dismissed
                        the claim and an appeal to the supreme court has been
                        filed.


                                      115
<PAGE>

NOTE 25 - COLLATERALS, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

      C.    The consolidated subsidiary companies are committed as of the
            balance sheet date as follows:

      1.    Commitments:                             Adjusted NIS. (thousands)
                                                     -------------------------

      Acquisition of fixed assets                              133,732
      Suppliers of fuel, luboils and parts                      83,949
      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 (*)                                    382,570
      Lease obligation for a computer and other
        equipment over periods of up to five years                 744

      (*) The rental liability for each of the years
      following December 31, 1997 as follows:

      1998                                                      31,704
      1999                                                      31,445
      2000                                                      29,593
      2001                                                      25,116
      2002                                                      20,535
      2003 and thereafter                                      244,177
                                                               -------
                                                               382,570
                                                               =======

      2.    Commitments for investments:

            a.    In 1996 a consolidated company signed a conditional 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.15,000 thousands linked to the
                  representative rate of the U.S. dollar, for which it will
                  obtain a 35% share in the limited partnership.

            b.    In 1996, a consolidated subsidiary entered into a contractual
                  agreement with the company, A.P.S.K. Hom Tov (1993) Ltd.
                  (hereafter A.P.S.K.). Subject to pre-conditions not yet
                  fulfilled, the consolidated subsidiary intends to invest
                  approximately NIS. 5,600 thousands linked to the
                  representative rate of the U.S. dollar in return for 50.1% of
                  A.P.S.K.'s share capital. Non fulfillment of the pre-existing
                  conditions may cause the retroactive cancellation of the
                  agreement.

            c.    In 1997, the Company, through a consolidated subsidiary signed
                  an agreement to invest in a venture capital fund the amount of
                  NIS. 4,400 thousand. As of the balance sheet date, the Company
                  invested approximately NIS. 1,300 thousand.

            d.    In 1997, a consolidated subsidiary signed an agreement to
                  acquire rights in land and building to be erected, in which
                  its offices will be located. The consolidated subsidiary
                  committed itself to invest NIS. 20,000 thousand of which NIS.
                  5,700 thousand has been paid as of the balance sheet date.

            e.    In 1997, the Company committed itself to grant a loan in the
                  amount of NIS. 1,414 thousand to an affiliated company. As of
                  the balance sheet date, the amount of NIS. 431 has not yet
                  been granted.


                                      116
<PAGE>

NOTE 25 - COLLATERALS, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

      D.    The consolidated subsidiaries have contingent liabilities as of the
            balance sheet date in respect of:

                                                       Adjusted NIS. (thousands)
                                                       -------------------------

1.    Acquisition of crude oil and refined
      products - open letters of credit.                           2,616

2.    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).                  496

3.    Various guarantees.                                          5,370

4.    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.                   2,935

5.    Sonol is a guarantor to a bank on account of
      a loan granted by the bank to one of Sonol's
      agencies.                                                      898

6.    Sonol has given a guarantee to one of its
      customers on account of a tender for the
      supply of fuel products.                                     2,000

7.    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                           1,300

8.    Sonol is a guarantor to a bank on account of
      a loan granted by the bank to an affiliated
      company for financing acquired equipment.                      796

9.    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.                                      1,081

10.   The consolidated subsidiary Granite Properties
      is a guarantor to a bank regarding a loan granted
      by the bank to an affiliated company. The
      guarantee is unlimited but should not exceed the
      share of each shareholder in the total amount of
      loan granted to the affiliated company.                      4,195

11.   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


                                      117
<PAGE>

NOTE 25 - COLLATERAL, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

      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 debtors
                  (long-term loans granted) are of similar character (fuel
                  agencies). The highest balance due from any agent is NIS. 51
                  million included partly in current assets - customers - and
                  partly in long-term loans.

                  Against amounts due from customers, the Company has some
                  collaterals as are acceptable in the industry.

                  The financial statements include specific provisions for
                  receivables the collection of which is doubtful in the opinion
                  of the management.

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 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 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
            implementation of the separation agreement will be carried out in
            stages up to the end of March 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 has decided that the rule of "Continuity"
            will be in effect regarding this proposal which is awaiting its
            second and third reading in the Knesset.

      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.

      At this stage, 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.


                                      118
<PAGE>

NOTE 27 - TRANSACTIONS AND BALANCES WITH INTERESTED AND RELATED PARTIES

      a.    Income and expenses from interested and related parties.

            1.    Consist of:

<TABLE>
<CAPTION>
                                                                     Year ended December 31,
                                            -------------------------------------------------------------------
                                                     1997                   1996                  1995
                                                     ----                   ----                  ----
                                                                    Adjusted NIS. (thousands)
                                            -------------------------------------------------------------------
                                            Interested   Related   Interested   Related    Interested   Related
                                            parties      parties   parties      parties    parties      parties
                                            -------      -------   -------      -------    -------      -------

            <S>                               <C>         <C>         <C>        <C>          <C>         <C>
            Finance expenses                  1,120         131       77            --        261          --
            Finance income                       --         450       --           502        320         686
            Income from Management Services      --       6,305       --         2,146         --         772
</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 the Oil
                  Refineries Ltd. which is obligated to supply its products to
                  the fuel marketing companies at the refineries gate price
                  which is under Government control.

      b.    Benefits to interested parties

                                                       Year ended December 31,
                                                      -------------------------
                                           Number     1997       1996      1995
                                             of       ----       ----      ----
                                           persons    Adjusted NIS. (thousands)
                                           -------    -------------------------
                  1.  Interested party
                      employed by the
                      company                 1      1,406       1,305   * 2,248

                  2.  Directors              13        663  **     487      780

            *     Includes former interested party who completed his term during
                  1995.

            **    Includes NIS. 201 thousand cancellation of over provision from
                  1995.


                                      119
<PAGE>

NOTE 27 - TRANSACTIONS AND BALANCES WITH INTERESTED AND RELATED PARTIES
          (CONTINUED)

            c.    Balances with interested and related parties

<TABLE>
<CAPTION>
                                            December 31, 1997        December 31,1996
                                            -------------------      -----------------
                                                     Adjusted NIS. (thousands)
                                            ------------------------------------------
                                            Interested  Related    Interested  Related
                                            parties     parties    parties     parties
                                            ----------  -------    ----------  -------
            <S>                             <C>         <C>        <C>         <C>
            Current assets:
              Trade receivables              9,023       2,613        454       3,586
              Accounts receivable               --         693         --         243
                                            ------      ------     ------      ------
                                             9,023       3,306        454       3,829
                                            ======      ======     ======      ======
            Loans and capital notes
              to subsidiary companies           --      14,466         --      19,032
                                            ======      ======     ======      ======

            The highest balance with
              interested parties during
              the year                       9,491                 13,295
                                            ======                 ======

            Current liabilities:
              Credits from banks
              and others                        --       2,575     10,699          --
              Trade payables                    --       2,381         --       2,652
              Accounts payable                  --         258      1,176         262
                                            ------      ------     ------      ------
                                                --       5,214     11,875       2,914
                                            ======      ======     ======      ======
            The highest balance
              with interested
              parties during
              the year                      15,454                 11,875
                                            ======                 ======
</TABLE>


                                      120
<PAGE>

NOTE 28 - 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
      principals 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)

                                                   Translated to U.S. Dollars
                                                         December 31,
                                                   --------------------------
                                                         1997      1996
                                                         ----      ----
      Current assets
       Cash and cash equivalents                      2,220           3,122
       Marketable securities                          1,232           1,512
       Trade receivables                            138,228         149,908
       Accounts receivable                           21,991         *10,074
       Inventories                                   76,737          92,511
                                                    -------         -------
                                                    240,408         257,127
                                                    -------         -------

      Investments, long-term loans and
        debit balances
       Subsidiaries, affiliated companies
        and others                                   36,766         *34,475
       Long-term loans                               21,509          15,640
       Future tax benefits (II)                         623             186
                                                    -------         -------
                                                     58,898          50,301
                                                    -------         -------

     Fixed assets
       Cost                                         246,381         229,688
       Less: Accumulated depreciation               112,240          99,173
                                                    -------         -------
                                                    134,141         130,515
                                                    -------         -------

      Intangible assets and deferred charges, net    12,564           8,749
                                                    -------         -------

                                                    446,011         446,692
                                                    =======         =======

*  Reclassified


                                      121
<PAGE>

NOTE 28 - FINANCIAL STATEMENTS TRANSLATED INTO U.S. DOLLARS (CONTINUED)

                          CONSOLIDATED BALANCE SHEETS
                                 (In thousands)

                                               Translated to U.S. Dollars
                                               --------------------------
                                                     December 31,
                                               --------------------------
                                                    1997      1996
                                                    ----      ----
     Current liabilities
       Credits from banks and others               127,285    77,595
       Current portion of convertible
         debentures                                 11,387    11,387
       Trade payables                               13,066    55,125
       Accounts payable                             25,729   *38,397
                                                   -------   -------
                                                   177,467   182,504
                                                   -------   -------

     Long-term liabilities
       Long-term loans                              25,365    19,527
       Debentures convertible into shares
         of the company (I)                         43,161    53,657
       Debentures convertible into shares
         of a subsidiary                                --       629
       Customers' deposits                          17,526    18,526
       Liabilities for employee rights upon
         retirement, net                             3,084     2,838
       Capital notes issued by a consolidated
         company                                        61        66
                                                   -------   -------

                                                    89,197    95,243
                                                   -------   -------

     Minority interest                               2,813     2,618
                                                   -------   -------

     Shareholders' equity                          176,534   166,327
                                                   -------   -------

                                                   446,011   446,692
                                                   =======   =======

*  Reclassified


                                      122
<PAGE>

NOTE 28 - FINANCIAL STATEMENTS TRANSLATED INTO U.S. DOLLARS (CONTINUED)

                        CONSOLIDATED STATEMENTS OF INCOME
                                 (In thousands)

                                                  Translated to U.S. Dollars
                                            ------------------------------------
                                                    Year ended December 31,
                                            ------------------------------------
                                              1997        *1996         *1995
                                              ----         ----          ----
Revenues:
  Sales                                     873,668       871,091       769,066
  Less: Government imposts                  352,963       337,685       266,939
                                            -------       -------       -------

  Net sales                                 520,705       533,406       502,127
  Other income, net                           5,137         2,777           811
                                            -------       -------       -------
                                            525,842       536,183       502,938
                                            -------       -------       -------

Costs and expenses:
  Cost of sales                             403,680       417,201       398,125
  Selling, general and
    administrative expenses                  70,695        68,804        58,139
  Depreciation and amortization              14,251        12,756        10,874
  Financing expenses, net                     7,558         6,033         3,212
                                            -------       -------       -------
                                            496,184       504,794       470,350
                                            -------       -------       -------
Operating income before taxes
  on income                                  29,658        31,389        32,588
Taxes on income                              10,494        10,554        11,663
                                            -------       -------       -------
Operating income after taxes
  on income                                  19,164        20,835        20,925
Company's share in income
  (loss) of affiliates, net                    (865)            2          (759)
Minority interest in income of
  consolidated subsidiaries                      10          (557)         (285)
                                            -------       -------       -------

Net income for the year                      18,309        20,280        19,881
                                            =======       =======       =======

Earnings per ordinary share:

Primary                                        0.15          0.17          0.16
                                            =======       =======       =======

Fully diluted                                  0.13          0.14          0.14
                                            =======       =======       =======

*  Reclassified.


                                      123
<PAGE>

NOTE 28 - FINANCIAL STATEMENTS TRANSLATED INTO U.S. DOLLARS (CONTINUED)

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (In thousands)

<TABLE>
<CAPTION>
                                     Translated to U.S. Dollars
                                     ----------------------------------------------
                                                Unrealized
                                                   Gain on                 Retained
                                     Capital    Securities  Reserves(II)   Earnings     Total
                                     -------    ----------  ------------   --------     -----
<S>                                   <C>           <C>        <C>         <C>         <C>
Balance as at January 1, 1995:        55,735         --        36,006       64,052     155,793

Changes in 1995:

Net income for the year                   --         --            --       19,881      19,881

Dividend paid (III)                       --         --            --      (21,107)    (21,107)
                                      ------      -----        ------       ------     -------

Balance as at December 31,
  1995 (III)                          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

Net unrealized gain on securities
  available for sale                      --        379            --           --         379

Dividend paid                             --         --            --       (8,481)     (8,481)
                                      ------      -----        ------       ------     -------

Balance as at December 31, 1997       55,735        379        36,006       84,414     176,534
                                      ======      =====        ======       ======     =======
</TABLE>


                                      124
<PAGE>

NOTE 28 - 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 issue 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:

                                                      U.S. Dollars (thousands)
                                                      ------------------------
                                                              December 31,
                                                      ------------------------
                                                        1997            1996
                                                        ----            ----

            Debentures (Series 1 and 2) - face value   55,258          66,295
            Discount (Series 1) (*)                     1,339           1,880
                                                       ------          ------
                                                       53,919          64,415
            Less current portion                       10,758          10,758
                                                       ------          ------

                                                       43,161          53,657
                                                       ======          ======

            (*)   The discount is being amortized over the remaining period
                  until maturity.

            See note 14.B.

      (II)  In the said public offering the Company issued stock options to
            employees. The excess of the value of the options granted over the
            cost to the employees in the amount $ 1,296 thousand was charged to
            the statement of income and credited to capital reserves. On this
            amount the Company recorded deferred tax benefits in the amount of $
            548 thousand which is recognized for tax purposes when such options
            are transferred to the employees and income tax is paid thereon. As
            of the balance sheet date, the balance of deferred tax benefits is
            $ NIL (1996 - $ 120 thousand).

      (III) As mentioned in the 1994 Financial Statements, the Board of
            Directors, subsequent to that balance sheet date, passed a
            resolution regarding the payment of an interim dividend. The
            dividend of $ 13,263 thousand which was paid in 1995, while
            reflected in the 1994 Israel Shekel Financial Statements is included
            together with the $ 7,844 thousand dividend paid for 1995 in the
            translated dollar statements in accordance with Generally Accepted
            Accounting Principles.

      (IV)  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, 1997, the adoption of SFAS 121 did not
            have a material effect on the Company.


                                      125
<PAGE>

                  LIST OF THE MAIN SUBSIDIARIES AND AFFILIATES



                                                        Holding and Control
                                                        at balance sheet date
                                                        ---------------------
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 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
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
Motoricka Ltd.                                                  51
Sonol Agencies Shovas (1996) Ltd.                               60
Sonol Cnaan Ltd.                                                51
Sonol Shani Agencies Ltd.                                       51

Affiliated Companies
--------------------

Aviation Services Ltd.                                          22.5
Tanker Services Ltd.                                            25
United Petroleum Export Company Ltd.                            25
Otzem Promotion and Investments Ltd.                            50
Texma Chemicals Ltd.                                            50
Yarok Az Ltd.                                                   22.9
Etzion Gas Products Ltd.                                        50
Lev Magor Management and Services Ltd.                          50
Park Cible Management and Holdings Ltd.                         50
Nitzba Holdings (1995) Ltd.                                     10
Orpak Industries (1983) Ltd.                                    10

The above list does not include inactive and/or immaterial affiliated companies
and other companies.


                                      126
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (An Israeli corporation)
                               1997 ANNUAL REPORT


                                      127
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                               1997 ANNUAL REPORT

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                              PAGE
                                                                                                            ---------
<S>                                                                                                         <C>
AUDITORS' REPORT..........................................................................................    129
FINANCIAL STATEMENTS--OF THE COMPANY AND CONSOLIDATED
  --IN ADJUSTED NEW ISRAELI SHEKELS (NIS):
  Balance sheets..........................................................................................    131
  Statements of income....................................................................................    133
  Statements of changes in shareholders' equity...........................................................    134
  Statements of cash flows................................................................................    135
  Notes to financial statements...........................................................................    137
</TABLE>


                                      128
<PAGE>

                  [LOGO]

                         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, 1997 and 1996
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, 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 did not audit the financial statements of certain subsidiaries, whose
assets constitute approximately 22% and 25% of total consolidated assets as of
December 31, 1997 and 1996, respectively, and whose revenues constitute
approximately 11%, 13% and 25% of total consolidated revenues and gains for the
years ended December 31, 1997, 1996 and 1995, 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, 1997 and 1996 is
adjusted NIS 182,157,000 and adjusted NIS 106,965,000, respectively, and the
Company's share in excess of profits over losses of which is a net amount of
adjusted NIS 7,592,000 in 1997, adjusted NIS 10,361,000 in 1996 and adjusted NIS
2,313,000 in 1995. The data for the year ended December 31, 1995 have been
restated, as explained in note 1o. 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.

    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 13.


                                      129


                                    [LOGO]
<PAGE>

    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, 1997 and 1996 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, 1997,
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 or loss and shareholders' equity to the extent summarized
in note 14.

    The special condensed consolidated financial statements which are presented
in note 14 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
                                          --------------------------------------
                                          Kesselman & Kesselman
                                          Certified Public Accountants (Isr.)

Tel-Aviv, Israel
March 16, 1998


                                      130
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                                 BALANCE SHEETS

                        IN ADJUSTED NEW ISRAELI SHEKELS
<TABLE>
<CAPTION>
                                                                             CONSOLIDATED          THE COMPANY
                                                                         --------------------  --------------------
                                                                             DECEMBER 31           DECEMBER 31
                                                                         --------------------  --------------------
                                                                NOTE       1997       1996       1997       1996
                                                              ---------  ---------  ---------  ---------  ---------
                                                                             IN THOUSANDS          IN THOUSANDS
<S>                                                           <C>        <C>        <C>        <C>        <C>
                           ASSETS                                7c
CURRENT ASSETS:.............................................     11
  Cash and cash equivalents.................................                39,156      2,108     38,863      2,097
  Short-term loans receivable from associated companies (the
    Company--and from subsidiaries).........................     10b        12,216      9,616     37,501     54,225
  Short-term investments....................................     12a         5,327      5,587      5,327      5,587
  Accounts receivable.......................................     12b         3,626      3,401        555      1,092
  Buildings under construction, net of advances from
    purchaser...............................................     5b          8,682     15,860      8,682
  Capital notes from shareholders...........................     10b                    8,559                 8,559
  Deferred income taxes.....................................     9b          1,895      3,973      1,895
                                                                         ---------  ---------  ---------  ---------
      Total current assets..................................                70,902     49,104     92,823     71,560
                                                                         ---------  ---------  ---------  ---------

LAND--BUSINESS INVENTORY....................................    7a(4)       12,514     11,773
                                                                         ---------  ---------

INVESTMENTS:
  Subsidiaries..............................................      2                               40,485     35,202
  Associated companies......................................      3        229,298    252,918    182,638    202,457
  Other companies...........................................      4          8,001     12,140      8,001     12,140
  Long-term bank deposit....................................   11;12c       10,353                10,353
                                                                         ---------  ---------  ---------  ---------
                                                                           247,652    265,058    241,477    249,799
                                                                         ---------  ---------  ---------  ---------
FIXED ASSETS, net of accumulated depreciation...............      5         78,448    112,193     34,882     67,765
                                                                         ---------  ---------  ---------  ---------
                                                                           409,516    438,128    369,182    389,124
                                                                         ---------  ---------  ---------  ---------
                                                                         ---------  ---------  ---------  ---------
</TABLE>

            /s/ DR. Y. GLEITMAN
-------------------------------------------
              Dr. Y. Gleitman
     CHAIRMAN OF THE BOARD OF DIRECTORS

               /s/ Y. KAPLAN
-------------------------------------------
                 Y. Kaplan
             MANAGING DIRECTOR

Date of approval of the financial statements: March 16, 1998


                                      131
<PAGE>

<TABLE>
<CAPTION>
                                                                            CONSOLIDATED          THE COMPANY
                                                                        --------------------  --------------------
                                                                            DECEMBER 31           DECEMBER 31
                                                                        --------------------  --------------------
                                                              NOTE        1997       1996       1997       1996
                                                           -----------  ---------  ---------  ---------  ---------
                                                                            IN THOUSANDS          IN THOUSANDS
<S>                                                        <C>          <C>        <C>        <C>        <C>
          LIABILITIES AND SHAREHOLDERS' EQUITY                 7c
CURRENT LIABILITIES:.....................................      11
  Bank credit............................................      12d         21,879     45,112     20,100     42,968
  Short-term loans from shareholders.....................      10b                    37,332                37,332
  Accounts payable and accruals..........................      12e         12,341     12,301     11,924      4,103
  Dividend payable.......................................                  25,000                25,000
  Deferred income taxes..................................      9b                                              948
                                                                        ---------  ---------  ---------  ---------
      Total current liabilities..........................                  59,220     94,745     57,024     85,351
                                                                        ---------  ---------  ---------  ---------
LONG-TERM LIABILITIES:
  Bank loans (net of current maturities).................     6;11        114,520    132,947     89,556    106,499
  Payables in respect of acquisition of land-- business
    inventory--related parties...........................   7a(4);10b      12,026     11,773
  Deferred income taxes..................................      9b           1,148      1,389
                                                                        ---------  ---------  ---------  ---------
      Total long-term liabilities........................                 127,694    146,109     89,556    106,499
                                                                        ---------  ---------  ---------  ---------
COMMITMENTS AND CONTINGENT LIABILITIES...................       7
                                                                        ---------  ---------  ---------  ---------
      Total liabilities..................................                 186,914    240,854    146,580    191,850
SHAREHOLDERS' EQUITY.....................................       8         222,602    197,274    222,602    197,274
                                                                        ---------  ---------  ---------  ---------
                                                                          409,516    438,128    369,182    389,124
                                                                        ---------  ---------  ---------  ---------
                                                                        ---------  ---------  ---------  ---------
</TABLE>

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


                                      132
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                              STATEMENTS OF INCOME

                        IN ADJUSTED NEW ISRAELI SHEKELS
<TABLE>
<CAPTION>
                                                                          CONSOLIDATED                      THE COMPANY
                                                                 -------------------------------  -------------------------------
                                                        NOTE       1997       1996       1995       1997       1996       1995
                                                     ----------  ---------  ---------  ---------  ---------  ---------  ---------
                                                                          IN THOUSANDS                     IN THOUSANDS
<S>                                                  <C>         <C>        <C>        <C>        <C>        <C>        <C>
REVENUES AND GAINS:
  From lease of buildings..........................     10a          5,540      5,495      5,533
  Share in profits of associated companies-- net...      3           8,608     11,209     *3,481      6,938      9,846     *2,619
  Profits of subsidiaries--net.....................      2                                            5,482      1,424      1,709
  Gain on dilution of holding in associated
    companies resulting from issuance of shares to
    a third party--net.............................      3           6,743     20,113        665      6,743     20,113        665
  Gain from sale of investments in associated
    companies......................................      3         117,813     13,886        788    117,813     13,886        788
  Gain from sale and increase in value of quoted
    shares.........................................                  6,517                 7,963      6,517                 7,963
  Dividend received from another company...........                    354        112        296        354        112        296
  Management fees from associated company (the
    Company--and from a subsidiary)................     10a          1,272      1,192      1,017      1,182      1,103      1,105
  Capital gain from sale of building under
    construction...................................                  9,351
                                                                 ---------  ---------  ---------  ---------  ---------  ---------
                                                                   156,198     52,007     19,743    145,029     46,484     15,145
                                                                 ---------  ---------  ---------  ---------  ---------  ---------
EXPENSES AND LOSSES:
  Depreciation of buildings........................                    940        958      1,005
  Write-down of investments in other companies.....      4           5,731      2,675      1,217      5,731      2,675      1,217
  Loss from decrease in value of quated shares.....                             2,659                            2,659
  General and administrative expenses..............   10a;12h        4,483      2,177      1,822      1,860        478        391
  Capital loss from sale of fixed assets...........                               416
  Financial expenses--net..........................   10a;12i        5,584      8,089      6,614      3,368      6,568      5,181
                                                                 ---------  ---------  ---------  ---------  ---------  ---------
                                                                    16,738     16,974     10,658     10,959     12,380      6,789
                                                                 ---------  ---------  ---------  ---------  ---------  ---------
INCOME BEFORE TAXES ON INCOME......................                139,460     35,033      9,085    134,070     34,104      8,356
TAXES ON INCOME....................................      9          31,007      6,143      3,462     25,617      5,214      2,733
                                                                 ---------  ---------  ---------  ---------  ---------  ---------
NET INCOME FOR THE YEAR............................                108,453     28,890      5,623    108,453     28,890      5,623
                                                                 ---------  ---------  ---------  ---------  ---------  ---------
                                                                 ---------  ---------  ---------  ---------  ---------  ---------
</TABLE>

------------------------

*   Restated, see note 1o.

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


                                      133
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

                        IN ADJUSTED NEW ISRAELI SHEKELS

<TABLE>
<CAPTION>
                                                                                                  DIFFERENCES FROM
                                                                                                   TRANSLATION OF
                                                                                                  FOREIGN CURRENCY
                                                                                                      FINANCIAL
                                                                                                     STATEMENTS
                                                                                                 OF A SUBSIDIARY AND
                                                                                                     ASSOCIATED
                                                                 SHARE      CAPITAL   RETAINED        COMPANIES
                                                                CAPITAL     SURPLUS   EARNINGS      (NOTE 1B(4))        TOTAL
                                                              -----------  ---------  ---------  -------------------  ---------
<S>                                                           <C>          <C>        <C>        <C>                  <C>
                                                                                        IN THOUSANDS
BALANCE AT JANUARY 1, 1995..................................       2,428      51,935    118,016          (3,668)        168,711
CHANGES DURING 1995:
  Net income................................................                             *5,623                          *5,623
  Erosion of capital notes issued to the Company by
    shareholders............................................                               (770)                           (770)
  Company's share in erosion of capital note issued by an
    associated company to a subsidiary......................                               (137)                           (137)
  Differences from translation of foreign currency financial
    statements of a subsidiary and associated companies.....                                             (1,407)         (1,407)
                                                                   -----   ---------  ---------          ------       ---------
BALANCE AT DECEMBER 31, 1995................................       2,428      51,935    122,732          (5,075)        172,020
CHANGES DURING 1996:
  Net income................................................                             28,890                          28,890
  Erosion of capital notes issued to the Company by
    shareholders............................................                               (906)                           (906)
  Company's share in erosion of capital note issued by an
    associated company to a subsidiary......................                               (191)                           (191)
  Differences from translation of foreign currency financial
    statements of a subsidiary and associated companies.....                                             (2,539)         (2,539)
                                                                   -----   ---------  ---------          ------       ---------
BALANCE AT DECEMBER 31, 1996................................       2,428      51,935    150,525          (7,614)        197,274
CHANGES DURING 1997:
  Net income................................................                            108,453                         108,453
  Company's share in erosion of capital note issued by an
    associated company to a subsidiary......................                               (132)                           (132)
  Differences from translation of foreign currency financial
    statements of a subsidiary and associated companies.....                                              7,389           7,389
  Dividend..................................................                            (90,382)                        (90,382)
                                                                   -----   ---------  ---------          ------       ---------
BALANCE AT DECEMBER 31, 1997................................       2,428      51,935    168,464            (225)        222,602
                                                                   -----   ---------  ---------          ------       ---------
                                                                   -----   ---------  ---------          ------       ---------
</TABLE>

------------------------

*   Restated, see note 1o.

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


                                      134
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                            STATEMENTS OF CASH FLOWS

                        IN ADJUSTED NEW ISRAELI SHEKELS
<TABLE>
<CAPTION>
                                                                       CONSOLIDATED                      THE COMPANY
                                                              -------------------------------  -------------------------------
                                                                1997       1996       1995       1997       1996       1995
                                                              ---------  ---------  ---------  ---------  ---------  ---------
                                                                       IN THOUSANDS                     IN THOUSANDS
                                                              ----------------------------------------------------------------
<S>                                                           <C>        <C>        <C>        <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income for the year...................................    108,453     28,890    **5,623    108,453     28,890    **5,623
  Adjustments required to reflect the cash flows from
    operating activities*...................................   (114,716)   (28,040)    (5,851)  (112,806)   (30,447)    (7,004)
                                                              ---------  ---------  ---------  ---------  ---------  ---------
  Net cash provided by (used in) operating activities.......     (6,263)       850       (228)    (4,353)    (1,557)    (1,381)
                                                              ---------  ---------  ---------  ---------  ---------  ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Investment in associated companies (including capital
    notes and loans)........................................     (5,739)               (5,338)    (5,739)              (81,950)
  Investment in other companies.............................     (2,126)    (3,220)    (2,160)    (2,126)    (3,220)    (2,160)
  Investment in fixed assets and in buildings under
    construction............................................    (26,005)   (30,154)   (40,777)   (24,072)   (25,840)   (30,027)
  Long-term bank deposit....................................    (10,353)                         (10,353)
  Short-term bank deposit...................................     (5,385)                          (5,385)
  Increase in land--business inventory......................       (488)
  Proceeds from sale of short-term investments, net of
    related taxes...........................................     11,162                19,411     11,162                19,411
  Proceeds from sale of shares in associated companies, net
    of related taxes........................................    141,920     14,786      1,674    141,920     14,786      1,674
  Proceeds from sale of investment in another company.......        568                              568
  Proceeds from sale of fixed assets........................                   763                                      19,411
  Proceeds from sale of building under construction, net of
    related taxes...........................................     20,703
  Decrease (increase) in short-term loans granted to
    associated companies (the Company--and subsidiaries)....     (2,600)      (723)    (1,219)    16,724      3,460     58,271
  Collection of capital notes from an associated company....      7,987      1,149      1,552      3,215      1,149      1,552
  Advances from purchasers of building under construction...     48,195     10,119                48,195
                                                              ---------  ---------  ---------  ---------  ---------  ---------
  Net cash provided by (used in) investing activities.......    177,839     (7,280)   (26,857)   174,109     (9,665)   (33,229)
                                                              ---------  ---------  ---------  ---------  ---------  ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Discharge of long-term bank loans.........................    (17,279)    (5,877)   (10,222)   (16,109)      (695)    (3,350)
  Increase (decrease) in short-term loans from
    shareholders--net.......................................    (37,332)     6,575       (554)   (37,332)     6,575       (554)
  Discharge of capital notes from shareholders..............      8,559                            8,559
  Dividend paid.............................................    (65,382)                         (65,382)
  Increase (decrease) in short-term bank credit--net........    (23,094)     6,846     19,636    (22,726)     6,471     20,266
                                                              ---------  ---------  ---------  ---------  ---------  ---------
  Net cash provided by (used in) financing activities.......   (134,528)     7,544      8,860   (132,990)    12,351     16,362
                                                              ---------  ---------  ---------  ---------  ---------  ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............     37,048      1,114    (18,225)    36,766      1,129    (18,248)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..............      2,108        994     19,219      2,097        968     19,216
                                                              ---------  ---------  ---------  ---------  ---------  ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR....................     39,156      2,108        994     38,863      2,097        968
                                                              ---------  ---------  ---------  ---------  ---------  ---------
                                                              ---------  ---------  ---------  ---------  ---------  ---------
</TABLE>


                                      135
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                            STATEMENTS OF CASH FLOWS

                        IN ADJUSTED NEW ISRAELI SHEKELS

<TABLE>
<CAPTION>
                                                                      CONSOLIDATED                      THE COMPANY
                                                             -------------------------------  -------------------------------
                                                               1997       1996       1995       1997       1996       1995
                                                             ---------  ---------  ---------  ---------  ---------  ---------
                                                                      IN THOUSANDS                     IN THOUSANDS
                                                             ----------------------------------------------------------------
<S>                                                          <C>        <C>        <C>        <C>        <C>        <C>
* ADJUSTMENTS REQUIRED TO REFLECT THE CASH FLOWS FROM
  OPERATING ACTIVITIES:
  Income and expenses not involving cash flows:
    Share in profits of associated companies--net..........     (8,608)   (11,209)  **(3,481)    (6,938)    (9,846)  **(2,619)
    Less--dividends received from associated company.......      1,999      5,081      5,976      1,499      3,807      4,680
    Profits of subsidiaries--net...........................                                      (5,482)    (1,424)    (1,709)
    Depreciation...........................................      1,035      1,012      1,014         78         52          8
    Deferred income taxes--net.............................      1,837     (4,894)      (600)    (2,843)      (234)      (735)
    Gain on dilution of holding in associated companies
      resulting from issuance of shares to a third party...     (6,743)   (20,113)      (665)    (6,743)   (20,113)      (665)
    Gain from sale of investment in associated companies...   (117,813)   (13,886)      (788)  (117,813)   (13,886)      (788)
    Gain from sale of investment in other companies........        (34)                             (34)
    Capital loss from sale of fixed assets.................                   416
    Capital gain from sale of building under construction..     (9,351)
    Loss (gain) from sale and decrease (increase) in value
      of marketable securities--net........................     (6,517)     2,659     (7,963)    (6,517)     2,659     (7,963)
    Write-down of investments in other companies...........      5,731      2,675      1,217      5,731      2,675      1,217
    Erosion of principal of long-term bank loans--net......     (1,287)      (522)    (2,522)      (976)      (506)      (389)
    Accrued interest on capital notes of associated
      company--net.........................................       (126)      (182)      (263)      (126)      (182)      (263)
                                                             ---------  ---------  ---------  ---------  ---------  ---------
                                                              (139,877)   (38,963)    (8,075)  (140,164)   (36,998)    (9,226)
                                                             ---------  ---------  ---------  ---------  ---------  ---------
  Changes in operating asset and liability items:
    Decrease (increase) in accounts receivable.............      6,123     (2,631)     1,663        537       (517)     1,794
    Increase in accounts payable and accruals..............     19,038     13,554        561     26,821      7,068        428
                                                             ---------  ---------  ---------  ---------  ---------  ---------
                                                                25,161     10,923      2,224     27,358      6,551      2,222
                                                             ---------  ---------  ---------  ---------  ---------  ---------
                                                              (114,716)   (28,040)    (5,851)  (112,806)   (30,447)    (7,004)
                                                             ---------  ---------  ---------  ---------  ---------  ---------
                                                             ---------  ---------  ---------  ---------  ---------  ---------
</TABLE>

------------------------
**  Restated, see note 1o.

    Supplementary information on investing and financing activities not
involving cash flows:

1.  In December 1996, a subsidiary purchased property for adjusted NIS
    11,773,000. The property is presented in "land--business inventory". The
    purchase was financed by credit from the vendor and is given recognition in
    these statements only upon payment.

2.  In December 1997, the Company declared a dividend of adjusted NIS
    25,000,000. This dividend was paid on January 1, 1998.

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


                                      136
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                         NOTES TO FINANCIAL STATEMENTS

NOTE 1--SIGNIFICANT ACCOUNTING POLICIES

    The significant accounting policies, applied on a consistent basis, are as
follows (see also o.below):

A.  GENERAL:

    1)  Ophir Holdings Ltd. (hereafter--the Company) is a holding company which
       also owns commercial buildings under construction designated for rent and
       sale.

       The subsidiary, Ophir Financing Ltd., is engaged in granting and
       receiving loans (mainly to and from interested parties and related
       parties), see note 10a.

       The subsidiary, Merkazim Investments Ltd., is a holding and investment
       company engaged in the renting of commercial buildings.

       The subsidiary, New Horizons (1993) Ltd., holds a number of properties
       (designated for sale), which were purchased from an interested party. See
       also note 7a(4).

       The Company and its subsidiaries receive management services from
       shareholders in consideration of management fees.

       As to the activities of the associated companies, see note 3d.

    2)  Definitions:

<TABLE>
<S>                       <C>
Subsidiary -              a company controlled or owned to the extent of over 50%,
                          the financial statements of which have been consolidated
                          with the financial statements of the company.

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

Another company -         a company controlled to the extent of 20% or less and to
                          which the conditions specified in the preceding paragraph
                          do not apply.

The group -               the Company and its subsidiaries and associated
                          companies.

Interested parties -      as defined in the Israeli Securities (Preparation of
                          Annual Financial Statements) Regulations, 1993.

Related parties -         as defined in Opinion 29 of the Israeli Institute.
</TABLE>

B.  ADJUSTED FINANCIAL STATEMENTS:

    1)  The 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 Israeli Institute.
       All figures in the financial statements are presented in adjusted new
       Israeli shekels (NIS) which have a uniform purchasing power (December
       1997 adjusted NIS)--based upon the changes in the Israeli consumer price
       index; hereafter--the Israeli CPI (see also note 11b).


                                      137
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
       The adjustment of the financial statements is based on the accounts of
       the Company and its Israeli subsidiaries, maintained in nominal NIS.
       Condensed nominal Israeli currency data of the Company, on the basis of
       which its adjusted financial statements were prepared, are presented in
       note 13.

       The components of the income statements were, for the most part, adjusted
       as follows: the components relating to transactions carried out during
       the year were adjusted on the basis of the index for the month in which
       the transaction was carried out, while those relating to non-monetary
       balance sheet items (mainly--depreciation) were adjusted on the same
       basis as the related balance sheet item. The financing component
       represents financial income and expenses in real terms and the erosion of
       balances of monetary items during the year.

    2)  As mentioned in (1) above, these financial statements have been drawn up
       in accordance with the principles of adjustment prescribed by Opinions of
       the Israeli Institute, on the basis of the changes in the Israeli CPI. As
       to subsidiary and associated companies whose financial statements are
       drawn up in foreign currency, see (4) below.

    3)  The adjusted amounts of non-monetary assets do not necessarily represent
       realization value or current economic value, but only the original
       historical values, adjusted to reflect the changes in the general
       purchasing power of Israeli currency. In these financial statements, the
       term "cost" signifies cost in adjusted Israeli currency.

    4)  A subsidiary and associated companies whose financial statements are
       drawn up in foreign currency

       For purposes of consolidation or inclusion on the equity basis, the
       amounts (in foreign currency terms) included in the statements of the
       above companies were treated as follows:

       Balance sheet items at the end of the year and the results of operations
       for the year were translated at the exchange rate of the U.S. dollar
       (hereafter--the dollar) as compared to Israeli currency at the end of the
       year. Balance sheet items at the beginning of the year and changes in
       shareholders' equity items during the year were translated at the
       relevant exchange rate at the beginning of the year or at the date of
       each change and then adjusted on the basis of the changes in the Israeli
       CPI through the end of the year.

       Differences resulting from the above treatment are carried as a separate
       item under adjusted shareholders' equity ("differences from translation
       of foreign currency financial statements of a subsidiary and associated
       companies").

C.  PRINCIPLES OF CONSOLIDATION:

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

    2)  Intercompany balances and transactions have been eliminated.


                                      138
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
D.  MARKETABLE SECURITIES

    These securities (except for investment in shares constituting "permanent
    investment", see f(3), are stated at market value.

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

E.  LAND--BUSINESS INVENTORY

    The land is presented at cost which--in managements' estimation--is lower
    than market value.

F.  INVESTMENTS:

    1)  Subsidiaries

       In the Company's accounts, the investments in these companies are
       accounted for by the equity method.

    2)  Associated companies:

       a)  The investments in these companies are accounted for by the equity
           method.

       b)  The excess of cost of the investment in associated companies over the
           Company's share in their equity in net assets at date of acquisition
           ("excess of cost of investment") represents an amount not attributed
           to specific assets (goodwill). The amount attributed to goodwill is
           amortized in equal annual instalments over a period of 10 years,
           commencing in the year of acquisition.

    3)  Other companies

       The investments in the shares of these companies, including investments
       in quoted shares, which the Company intends to hold for a long period
       ("permanent investment"), are stated at cost, net of write-down for
       decrease in value which is not of a temporary nature.

G.  FIXED ASSETS:

    1)  These assets are stated at cost.

    2)  Cost of fixed assets includes the Company's share in joint ventures
       engaged mainly in construction of buildings.

    3)  Financial expenses in respect of loans and credit applied to finance the
       construction of buildings--incurred until construction is completed--are
       charged to cost of such buildings.

    4)  The assets are depreciated by the straight-line method, on basis of
       their estimated useful life.


                                      139
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
       Annual rates of depreciation are as follows:

                                                                           %
                                                                       ---------

Buildings leased out                                                         2-4

Vehicles                                                                      15

Office furniture and equipment (including computer and peripheral
  equipment)                                                                6-33

Machinery and equipment                                                     7-15

H.  DEFERRED INCOME TAXES:

    1)  Deferred taxes are computed in respect of differences between the
       amounts present in these statements and those taken into account for tax
       purposes. As to the factors in respect of which deferred taxes have been
       included--see note 9b.

       Deferred tax balances are computed at the tax rate expected to be in
       effect at time of release to income from the deferred tax accounts. The
       amount of deferred taxes presented in the income statement reflects
       changes in the above balances during the year.

    2)  Taxes which would apply in the event of disposal of investments in
       subsidiaries have not been taken into account in computing the deferred
       taxes, as it is the Company's policy to hold these investments, not to
       realize them.

       The Company will incur an additional tax liability at the rate of 15% in
       the event of distribution of dividend from income derived from "approved
       enterprises" of certain associated companies. This additional tax
       liability was not taken into account, since it is the Company's policy
       not to cause such additional tax liability upon distribution of
       dividends. If the Company resolves to distribute dividends to its
       shareholders, it will distribute them from dividends it receives from the
       abovementioned associated companies, the income of which is derived from
       "approved enterprises", so that the Company will not incur any additional
       tax liability in respect of receipt of the dividend.

I.  CAPITAL NOTES ISSUED TO OR BY INTERESTED PARTIES AND RELATED PARTIES

    The erosion of such capital notes, which are not linked and most of which do
    not bear interest, is carried to retained earnings in the statements of
    changes in shareholders' equity.

J.  REVENUE RECOGNITION:

    1)  Revenues from buildings sold are recognized by the "completed contracts"
       method. Under this method, revenue is recognized when the work required
       to complete the building is insignificant (up to 10% of total cost),
       provided most of the building is sold.

    2)  Income from leasing of buildings is recognized on the accrual basis, in
       accordance with the terms of the agreements with tenants.


                                      140
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
K.  CASH EQUIVALENTS

    The group considers all highly liquid investments, which include short-term
    bank deposits (up to 3 months from date of deposit), to be cash equivalents.

L.  NET INCOME PER NIS 1 OF PAR VALUE OF ORDINARY SHARES

    The financial statements do not include data regarding net income per NIS 1
    of par value of ordinary shares, since that data would not provide
    significant additional information to that otherwise provided by the
    financial statements.

M. FORMAT OF INCOME STATEMENTS

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

N.  LINKAGE BASIS

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

O.  RESTATEMENT

    The financial statements for 1995 were restated in order to reflect, with
    retroactive effect, the changes in the method of recognition of revenue by
    an associated company.

    The effect of this restatement on the net income for 1995 is as follows:

<TABLE>
<CAPTION>
                                                                                CONSOLIDATED
                                                                               AND THE COMPANY
                                                                              -----------------
<S>                                                                           <C>
                                                                                ADJUSTED NIS
                                                                                IN THOUSANDS
Net income, as previously reported..........................................          8,516
Effect of restatement--share in profits of
  associated companies--net.................................................         (2,893)
                                                                                     ------
Net income, as reported in these financial statements.......................          5,623
                                                                                     ------
                                                                                     ------
</TABLE>

NOTE 2--SUBSIDIARIES:

A.  SUBSIDIARIES CONSOLIDATED ARE AS FOLLOWS:

       Wholly-owned:

           Ophir Financing Ltd.

           Maoz Financial Investments Ltd.--inactive (hereafter--Maoz)

           Merkazim Investments Ltd. (a wholly-owned subsidiary of Maoz;
           hereafter--Merkazim)

           Merkazim New York, Inc. (a wholly-owned subsidiary of Merkazim;
           hereafter--Merkazim New York)


                                      141
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--SUBSIDIARIES: (CONTINUED)
       80% owned--

       New Horizons (1993) Ltd. (hereafter--New Horizons).

B.  THE INVESTMENTS ARE COMPOSED AS FOLLOWS:

<TABLE>
<CAPTION>
                                                                                 THE COMPANY
                                                                             --------------------
                                                                                 DECEMBER 31
                                                                             --------------------
                                                                               1997       1996
                                                                             ---------  ---------
                                                                                 ADJUSTED NIS
                                                                                 IN THOUSANDS
                                                                             --------------------
<S>                                                                          <C>        <C>
Cost of shares.............................................................        199        199
Accumulated undistributed profits..........................................     40,377     34,895
Differences from translation of foreign currency financial statements......       (107)      (100)
Erosion of capital note issued to a subsidiary by an associated company....         16        208
                                                                             ---------  ---------
                                                                                40,485     35,202
                                                                             ---------  ---------
                                                                             ---------  ---------
</TABLE>

C.  THE CHANGES IN INVESTMENTS IN 1997 ARE AS FOLLOWS:

<TABLE>
<CAPTION>
                                                                                   THE COMPANY
                                                                                  -------------
<S>                                                                               <C>
                                                                                  ADJUSTED NIS
                                                                                  IN THOUSANDS
                                                                                  -------------
Balance at beginning of year....................................................       35,202
Changes during the year:
  Profits of subsidiaries--net..................................................        5,482
  Erosion of capital note issued to a subsidiary by an
    associated company..........................................................         (192)
  Differences from translation of foreign currency
    financial statements........................................................           (7)
                                                                                       ------
Balance at end of year..........................................................       40,485
                                                                                       ------
                                                                                       ------
</TABLE>


                                      142
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--INVESTMENTS IN ASSOCIATED COMPANIES:

A. THE INVESTMENTS ARE COMPOSED AS FOLLOWS:

<TABLE>
<CAPTION>
                                                                            CONSOLIDATED          THE COMPANY
                                                                        --------------------  --------------------
                                                                            DECEMBER 31           DECEMBER 31
                                                                        --------------------  --------------------
                                                                          1997       1996       1997       1996
                                                                        ---------  ---------  ---------  ---------
                                                                                ADJUSTED NIS IN THOUSANDS
                                                                                -------------------------
<S>                                                                     <C>        <C>        <C>        <C>
Equity in net assets:
  Cost of shares......................................................     12,964      8,464     11,925      7,425
  Less--amortization of excess of cost of investment (1)..............     (1,622)      (903)    (1,622)      (903)
  Share in accumulated undistributed profits (including accumulated
    erosion of capital notes) (2).....................................     42,667     69,437     42,121     69,902
Differences from translation of foreign currency financial statements
  of associated companies.............................................       (225)    (7,614)      (118)    (7,514)
                                                                        ---------  ---------  ---------  ---------
                                                                           53,784     69,384     52,306     68,910
Capital notes of Mivnat Holdings Ltd. (including accrued interest)
  (3).................................................................    175,055    183,044    130,332    133,547
Capital note of Teledata Communications Ltd. (4)......................        459        490
                                                                        ---------  ---------  ---------  ---------
                                                                          229,298    252,918    182,638    202,457
                                                                        ---------  ---------  ---------  ---------
                                                                        ---------  ---------  ---------  ---------
</TABLE>

------------------------

(1) The excess cost of investment represents goodwill. The original amount of
    the goodwill was adjusted NIS 4,954,000 and its unamortized balance at
    December 31, 1997 is adjusted NIS 3,332,000.

(2) Including gain on dilution of holding in an associated company resulting
    from sale and issuance of shares to a third party.

(3) Capital notes (including accrued interest), with a total par value of NIS
    111,804,000--consolidated and NIS 81,877,000--the Company, are unlinked, do
    not bear interest, and are redeemable upon demand, part not later than March
    23, 2015 and part--not later than March 23, 2018.

(4) This capital note is unlinked, bears interest of NIS 1 per annum and is
    redeemable on call, but not before July 1, 2008.


                                      143
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--INVESTMENTS IN ASSOCIATED COMPANIES (CONTINUED):
B. THE INVESTMENTS IN 1997 ARE AS FOLLOWS:

<TABLE>
<CAPTION>
                                                                                       CONSOLIDATED   THE COMPANY
                                                                                       ------------  -------------
<S>                                                                                    <C>           <C>
                                                                                        ADJUSTED NIS IN THOUSANDS
                                                                                        -------------------------
Balance at beginning of year.........................................................      252,918        202,457
Changes during the year:
  Investments in shares..............................................................        5,739          5,739
  Proceeds from sale of investments..................................................     (159,920)      (159,920)
  Share in profits of associated companies--net......................................        8,608          6,938
  Dividend received..................................................................       (1,999)        (1,499)
  Differences from translation of foreign currency financial statements of associated
    companies........................................................................        7,389          7,396
  Collection of capital note.........................................................       (7,987)        (3,215)
  Interest accrued on capital note...................................................          126            126
  Share in erosion of capital note issued to a subsidiary by an associated company...         (132)            60
  Gain on dilution of holding in associated companies resulting from issuance to a
    third party--net.................................................................        6,743          6,743
  Gain from sale of investments in associated companies..............................      117,813        117,813
                                                                                       ------------  -------------
Balance at end of year...............................................................      229,298        182,638
                                                                                       ------------  -------------
                                                                                       ------------  -------------
</TABLE>

C. INVESTMENTS IN ASSOCIATED COMPANIES--GROUPED BY MAJOR CLASSIFICATIONS--ARE AS
  FOLLOWS:
<TABLE>
<CAPTION>
                                                                     CONSOLIDATED                THE COMPANY
                                                               -------------------------  -------------------------
                                                                               TOTAL                      TOTAL
                                                                             INVESTMENT                 INVESTMENT
                                                                SHARE IN       AS OF       SHARE IN       AS OF
                                                               NET PROFITS  DECEMBER 31,  NET PROFITS  DECEMBER 31,
                                                                FOR 1997        1997       FOR 1997        1997
                                                               -----------  ------------  -----------  ------------
                                                               ADJUSTED NIS IN THOUSANDS  ADJUSTED NIS IN THOUSANDS
                                                               -------------------------  -------------------------
<S>                                                            <C>          <C>           <C>          <C>
Construction and real estate.................................       6,690       187,744        5,020       141,084
Computers, communications and software.......................       1,918        41,554        1,918        41,554
                                                                    -----   ------------       -----   ------------
                                                                    8,608       229,298        6,938       182,638
                                                                    -----   ------------       -----   ------------
                                                                    -----   ------------       -----   ------------
</TABLE>

D. FOLLOWING ARE DETAILS RELATING TO THE ASSOCIATED COMPANIES:

    1) Memco Software Ltd. (hereafter--Memco):

       a)  In September 1994, the Company purchased shares conferring upon it
       10% holding in Memco, which is engaged in development, production and
       marketing of computer software to secure UNIX computer systems.

       b)  In July 1995, the Company exercised its option to purchase additional
       shares in Memco, conferring upon it an additional 10% of the holding
       therein in consideration of adjusted NIS


                                      144
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--INVESTMENTS IN ASSOCIATED COMPANIES (CONTINUED):
       4,598,000. As a result of the increase in holding, the Company commenced
       accounting for its investment in Memco by the equity method.

       c)  In July 1995, Memco issued share capital to others. As a result, the
       Company's holding in Memco was reduced to 18% and the Company derived a
       gain of approximately adjusted NIS 803,000.

       d)  Memco has initiated a key employee stock option plan. As a result of
       exercise of some of the options issued under that plan, the Company's
       holding in Memco was further diluted. In 1997 and 1996, the Company had a
       gain of approximately adjusted NIS 76,000 and adjusted NIS 198,000,
       respectively, as a result of exercise of the options. In 1995, the
       Company incurred losses of adjusted NIS 167,000 as a result of the
       dilution in its holding in Memco.

       e)  In October 1996, Memco offered in an initial public offering ("IPO")
       in the United States 3,000,000 shares, together with 365,000 shares
       offered by its shareholders (including the Company), at $15 per share.
       The underwriters of this IPO exercised their option to purchase 450,000
       shares from Memco and 54,750 shares from its shareholders. The net
       proceeds in this IPO were approximately $46 million (adjusted NIS
       160,981,000). Following this IPO, the Company's holdings in Memco
       decreased from approximately 17.7% to approximately 13.1%; the capital
       gain resulting from the IPO of Memco shares and from the sale of the
       Company's shares therein, approximately adjusted NIS 23,538,000, is
       included in 1996 income. Future sale of Memco shares by the Company is
       restricted by U.S. law and by the underwriting agreement. To the date of
       the IPO, the Company had the power to appoint two out of the seven
       directors of Memco. Close to the date of the IPO, the Company and other
       shareholders of Memco reached an agreement for cooperation at Memco's
       shareholders' meetings. Moreover, a voting agreement has been signed with
       most Memco shareholders, whereunder the Company is entitled to recommend
       a director on its behalf. In view of the above, the investment in Memco
       is still presented by the equity method.

       f)  In 1997, the Company sold 200,000 ordinary shares of Memco and
       derived a gain of approximately adjusted NIS 12,603,000. The sale of the
       shares and exercise of options by Memco's employees as per (d) above
       diluted the Company's holdings in Memco to approximately 11.6%.

       g)  Memco's shares are traded in the United States on the Nasdaq National
       Market. The market value of Memco's shares held by the Company at
       December 31, 1997 and 1996 is adjusted NIS 130,777,000 and adjusted NIS
       120,683,000, respectively. The carrying value of the investment in Memco
       shares at those dates is adjusted NIS 29,632,000 and adjusted NIS
       28,653,000, respectively.

       h)  Subsequent to December 31, 1997, the Company sold 182,000 ordinary
       shares of Memco for approximately $3,900,000 (NIS 14,177,000); as a
       result, the Company had a net gain of approximately adjusted NIS
       6,543,000. As a result, the Company's holdings in Memco were diluted to
       approximately 10.5%.


                                      145
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--INVESTMENTS IN ASSOCIATED COMPANIES (CONTINUED):
       i)  Following are condensed data from the consolidated financial
       statements of Memco, presented in U.S. dollars:
<TABLE>
<CAPTION>
                                                                                 DECEMBER 31
                                                                             --------------------
<S>                                                                          <C>        <C>
                                                                               1997       1996
                                                                             ---------  ---------
                                                                               U.S. DOLLARS IN
                                                                                  THOUSANDS
                                                                             --------------------
Balance sheets:
  Assets:
    Current assets.........................................................     73,549     62,770
    Fixed assets--net......................................................      2,528      1,222
    Other assets--net......................................................      1,656        523
                                                                             ---------  ---------
                                                                                77,733     64,515
                                                                             ---------  ---------
                                                                             ---------  ---------
  Liabilities and shareholders' equity:
    Current liabilities....................................................     12,166      7,652
    Long-term liabilities--net.............................................      2,238      3,923
    Shareholders' equity...................................................     63,329     52,940
                                                                             ---------  ---------
                                                                                77,733     64,515
                                                                             ---------  ---------
                                                                             ---------  ---------
</TABLE>

       Statements of income (loss):

<TABLE>
<CAPTION>
                                                                   1997       1996       *1995
                                                                 ---------  ---------  ---------
<S>                                                              <C>        <C>        <C>
                                                                    U.S. DOLLARS IN THOUSANDS
                                                                    -------------------------
Revenues.......................................................     30,591     15,312      1,549
                                                                 ---------  ---------  ---------
                                                                 ---------  ---------  ---------
Net income (loss) for the year.................................      9,076      3,384     (2,463)
                                                                 ---------  ---------  ---------
                                                                 ---------  ---------  ---------
</TABLE>

------------------------

*   Restated, see note 1a.

    2) Mivnat Holdings Ltd. (hereafter--Mivnat):

       a)  Mivnat was established in March 1993, by the Company, the subsidiary
       Merkazim and others, some of which are interested parties, for the
       purpose of acquiring the Israeli Government's shares in Industrial
       Buildings Company Ltd.; hereafter -Industrial Buildings. Mivnat purchased
       the said shares in March 1993 for approximately adjusted NIS 886 million.

       At December 31, 1997 and 1996, Mivnat holds approximately 52.2% of the
       issued and paid shares of Industrial Buildings (fully
       diluted--approximately 44% of the issued and paid share capital of
       Industrial Buildings), see also (h) below.

       Industrial Buildings is engaged in initiation, and construction, of
       buildings for industry, designated for rental and sale, and in the
       management of land development and infrastructure preparation for
       residence and industry.

       b)  The shares of Industrial Buildings are traded on the Tel-Aviv Stock
       Exchange. The market value of the holdings of the Company and Merkazim in
       the shares of Industrial Buildings (which


                                      146
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--INVESTMENTS IN ASSOCIATED COMPANIES (CONTINUED):
       are held through Mivnat and which are Mivnat's only asset) at December
       31, 1997 and 1996 is approximately adjusted NIS 225.5 million and
       adjusted NIS 133.4 million, respectively.

       c)  The percentages of holding in Mivnat at December 31, 1997 and 1996
           are as follows:

<TABLE>
<CAPTION>
                                                                                            %
                                                                                        ---------
<S>                                                                                     <C>
Consolidated--the Company and Merkazim................................................      25.00
                                                                                        ---------
                                                                                        ---------
The Company...........................................................................      18.75
                                                                                        ---------
                                                                                        ---------
</TABLE>

       d)  Claims have been filed in 1989-1997 against Industrial Buildings by
       insurance companies, a bank, contracting companies and others for a total
       amount of approximately NIS 39 million (effective as of the date of
       filing of the claims). In the opinion of the management of Industrial
       Buildings, based--in most cases--on the opinions of its legal counsel,
       Industrial Buildings has good defense against the claims. Therefore,
       provisions were made only in respect of a part of those claims in the
       financial statements of Industrial Buildings.

       In 1996, Industrial Buildings instituted legal proceedings for the
       collection of debts in arrears in the approximate amount of adjusted NIS
       14.4 million. No allowance for doubtful accounts has been made in respect
       of these debts.

       e)  Mivnat has guaranteed repayment of long-term loans received by the
       Company and Merkazim.

       f)  Mivnat has registered liens on all its assets and rights in favor of
       those who granted long-term loans to all its shareholders.

       g)  As to the pledge in respect of the investment of the Company and
       Merkazim in Mivnat, see note 7c(4).

       h)  As part of the public offering of securities by Jersualem Economic
       Corporation Ltd., Industrial Buildings and Mivnat, which took place in
       May 1997, Industrial Buildings and Mivnat offered warrants and purchase
       options exercisable in purchase of ordinary shares of Industrial
       Buildings. The net proceeds of Industrial Buildings from the offering of
       warrants was approximately adjusted NIS 0.97 million, and the net
       proceeds of Mivnat from the offering of purchase options was
       approximately adjusted NIS 10 million.

       On September 18, 1997, under a prospectus published by Jerusalem Economic
       Corporation Ltd. and Industrial Buildings, Industrial Buildings offered
       the public NIS 200,000,000 par value of debentures, 10,000,000 warrants
       exercisable in purchase of shares of Industrial Buildings and 1,000,000
       warrant exercisable in purchase of NIS 100,000,000 par value of
       debentures.

       Assuming exercise of all the warrants issued by Industrial Buildings and
       all the purchase options, the Company's indirect holdings in Industrial
       Buildings through Mivnat will decrease from approximately 13.1% to
       approximately 11%.


                                      147
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--INVESTMENTS IN ASSOCIATED COMPANIES (CONTINUED):
       i)  Following are condensed data from the consolidated financial
       statements of Mivnat:
<TABLE>
<CAPTION>
                                                                           DECEMBER 31
                                                                      ----------------------
                                                                         1997        1996
                                                                      ----------  ----------
                                                                           ADJUSTED NIS
                                                                           IN THOUSANDS
                                                                      ----------------------
<S>                                                                   <C>         <C>
Balance sheets:
  Assets:
    Current assets..................................................     402,808     231,977
    Investments and long-term receivables...........................     224,585     239,322
    Fixed assets--net...............................................   2,395,608   2,170,150
    Other assets--net...............................................       9,501       1,586
                                                                      ----------  ----------
                                                                       3,032,502   2,643,035
                                                                      ----------  ----------
                                                                      ----------  ----------
  Liabilities and shareholders' equity:
    Current liabilities.............................................     527,951     433,490
    Long-term liabilities--net......................................   1,706,235   1,483,939
    Minority interest...............................................     468,937     469,237
    Shareholders' equity............................................     329,379     256,369
                                                                      ----------  ----------
                                                                       3,032,502   2,643,035
                                                                      ----------  ----------
                                                                      ----------  ----------
</TABLE>

       Statements of income:

<TABLE>
<CAPTION>
                                                                 1997       1996       1995
                                                               ---------  ---------  ---------
<S>                                                            <C>        <C>        <C>
                                                                  ADJUSTED NIS IN THOUSANDS
                                                               -------------------------------
  Revenues...................................................    203,885    191,112    172,661
                                                               ---------  ---------  ---------
                                                               ---------  ---------  ---------
  Net income for the year....................................     26,434     21,920     20,721
                                                               ---------  ---------  ---------
                                                               ---------  ---------  ---------
</TABLE>

    3) Teledata Communications Ltd. (hereafter--Teledata):

       a)  Teledata, which is an associated company of Investment Company of
       Bank Hapoalim Ltd. (a major shareholder of the Company)--is engaged in
       design, development, production, marketing and servicing of
       telecommunications equipment.

       The percentages of holdings in Teledata are as follows:
<TABLE>
<CAPTION>
                                                                                      DECEMBER 31
                                                                                  --------------------
                                                                                    1997       1996
                                                                                  ---------  ---------
                                                                                      %          %
                                                                                     ---        ---
<S>                                                                               <C>        <C>
The Company.....................................................................        2.6       16.2
                                                                                        ---        ---
                                                                                        ---        ---
Investment Company of Bank Hapoalim Ltd. - directly.............................       18.3       29.2
                                                                                        ---        ---
                                                                                        ---        ---
</TABLE>

       b)  In 1997, the Company sold 1,402,000 ordinary shares of Teledata.
       860,000 of them were sold in the public offering (see (d) below). As a
       result of the public offering, the exercise of options by


                                      148
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--INVESTMENTS IN ASSOCIATED COMPANIES (CONTINUED):
       employees and the sale of shares, the Company's holding in Teledata was
       diluted from approximately 15.64% to approximately 2.72%. In 1997, the
       net gain from the issuance and sale of shares was approximately adjusted
       NIS 111,852,000.

       In 1996, the Company sold 250,000 ordinary shares of Teledata and derived
       a gain of adjusted NIS 9,668,000.

       In 1995, the Company sold 51,000 ordinary shares of Teledata and derived
       a gain of adjusted NIS 788,000.

       c)  Teledata has adopted a plan to grant share options to key employees
       and directors. During 1997, 1996 and 1995, some of the options were
       exercised and the Company had a gain of adjusted NIS 25,000, adjusted NIS
       595,000 and adjusted NIS 29,000, respectively.

       d)  In 1997, Teledata offered 1,514,000 ordinary shares to the public in
       the United States, together with 1,660,000 ordinary shares offered by its
       shareholders (including the Company), at $ 24 per share. Net proceeds
       from that offering approximated $36 million (adjusted NIS 131,625,000).

       e)  Teledata's shares are traded in the United States on the Nasdaq
       National Market. The market value of the Teledata shares held by the
       Company at December 31, 1997 and 1996 is adjusted NIS 22,092,000 and
       adjusted NIS 139,565,000, respectively. The carrying value of the
       investment in Teledata shares at those dates is adjusted NIS 10,983,000
       and adjusted NIS 33,257,000, respectively.


                                      149
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--INVESTMENTS IN ASSOCIATED COMPANIES (CONTINUED):
       f)  Following are condensed data from the consolidated financial
       statements of Teledata-- presented in U.S. dollars:
<TABLE>
<CAPTION>
                                                                               DECEMBER 31
                                                                           --------------------
                                                                             1997       1996
                                                                           ---------  ---------
                                                                             U.S. DOLLARS IN
                                                                                THOUSANDS
                                                                           --------------------
<S>                                                                        <C>        <C>
Balance sheets:
  Assets:
    Current assets.......................................................     95,851     62,514
    Investments and long-term receivables................................     32,499      7,389
    Fixed assets--net....................................................      8,136      6,112
    Other assets--net....................................................        163        195
                                                                           ---------  ---------
                                                                             136,649     76,210
                                                                           ---------  ---------
                                                                           ---------  ---------
  Liabilities and shareholders' equity:
    Current liabilities..................................................     18,786     15,485
    Long-term liabilities--net...........................................      1,461        974
    Minority interest....................................................      2,210        599
    Shareholders' equity.................................................    114,192     59,152
                                                                           ---------  ---------
                                                                             136,649     76,210
                                                                           ---------  ---------
                                                                           ---------  ---------
</TABLE>

<TABLE>
<CAPTION>
                                                                     1997       1996       1995
                                                                   ---------  ---------  ---------
<S>                                                                <C>        <C>        <C>
                                                                      U.S. DOLLARS IN THOUSANDS
                                                                   -------------------------------
Statements of income (loss):
  Revenues.......................................................     84,149     57,089     32,127
                                                                   ---------  ---------  ---------
                                                                   ---------  ---------  ---------
  Net income (loss) for the year.................................     14,985      6,991     (1,188)
                                                                   ---------  ---------  ---------
                                                                   ---------  ---------  ---------
</TABLE>

    4) Shmey-Bar Real Estate 1993 Ltd., Shmey-Bar (T.H.) 1993 Ltd. and Shmey-Bar
(I.A.) 1993 Ltd. (hereafter--Shmey-Bar companies)

    The Company, along with a group of companies, one of which is an interested
party, established the Shmey-Bar companies on December 9, 1993. These companies
were established for the purpose of dealing in real estate. They purchased
rights to real estate and options to purchase real estate in Tel-Aviv, Haifa,
Beer-Sheva, Kiryat Shemona, Eilat, etc., all from Hamashbir Hamerkazi Israel
Cooperative Wholesale Society Ltd.

    The Shmey-Bar companies commenced operations in 1994.

    The Company holds 1/6 of the ownership and control in each of the Shmey-Bar
companies.

    5) Derdan (Financing) Ltd. (hereafter--Derdan)

Derdan was established in June 1993 by the Company along with a group of
companies, one of which is an interested party, for the purpose of financing the
purchase of rights in real estate which Hamashbir


                                      150
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--INVESTMENTS IN ASSOCIATED COMPANIES (CONTINUED):
Hamerkazi Israel Cooperative Wholesale Society Ltd. has granted the associated
company Shmey-Bar (I.A.) 1993 Ltd. (see (4) above).

    Derdan commenced operations in 1994. The Company's share in Derdan is 25%.

    6) Clark/67 Associates L.P.--limited partnership

    In August 1994, the subsidiary Merkazim New York and others established a
limited partnership in the United States (hereafter -the partnership). The U.S.
subsidiary's share in the partnership is 50%. The partnership acquired a
commercial building in New Jersey, U.S.A. for a total cost of approximately $2.3
million. The partnership invested approximately $1 million in renovating the
building.

    In November 1997, Merkazim New York granted an option to a third party for
acquisition of its share in the partnership. In February 1998, the option was
exercised and as a result, Merkazim New York had a capital gain of approximately
$800,000 (NIS 2,828,000).

    7) Memadim Investments Ltd. (hereafter--Memadim)

    Memadim was established in the last quarter of 1995 by the Company, along
with a group of companies one of which is an associated company, for the purpose
of trading in real estate. The Company directly holds 10% of the ownership and
control of Memadim and an associated company holds 40% of the ownership and
control of Memadim.

    8) Soliton Ltd. (hereafter--Soliton)

    Soliton, a private Israeli company, was established in January 1997, with
the aim of developing a protection program as a solution to safeguarding data on
the internet and intranet.

    In December 1997, the Company invested adjusted NIS 2,649,000 in Soliton.
The associated company Memco, that plans to act as an OEM distributor for
Soliton products, invested a similar amount.

    The Company holds 16.6% of the ownerhsip and control of Soliton.

    9) Secure Video Sysetms Ltd. (hereafter--SVIS)

    SVIS, a private Israeli company was established in 1995 and is engaged in
developing technology for video coding and reconstruction of data.

    In 1997, the Company invested approximately adjusted NIS 920,000 in SVIS;
consequently, the Company holds 23% of the ownership and control of that
company.

    10) INFIT Ltd. (hereafter--INFIT)

    INFIT is a private Israeli company specializing in communications protocols
and data compression on the internet, as well as the development of edge to edge
communications solutions.

    In December 1997, the Company invested adjusted NIS 2,170,000, in INFIT;
consequently, the Company holds approximately 13.6% of the ownership and control
of INFIT.


                                      151
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--INVESTMENTS IN OTHER COMPANIES:
<TABLE>
<CAPTION>
                                                                                CONSOLIDATED AND
                                                                                  THE COMPANY
                                                                              --------------------
                                                                                  DECEMBER 31
                                                                              --------------------
                                                                                1997       1996
                                                                              ---------  ---------
                                                                                ADJUSTED NIS IN
                                                                                   THOUSANDS
                                                                              --------------------
<S>                                                                           <C>        <C>
Dovrat, Shrem--Keren Shakim 92 Ltd. -"Keren Shakim" (a).....................      1,165      2,183
Mahalachim Investment in Technology Ltd.--"Mahalachim" (b)..................      1,254      3,204
Carmel Biosensor Ltd.--"Carmel"(c)..........................................        458        810
Industrial Buildings--quoted shares (d).....................................      4,327      4,287
Mainsoft Corporation--"Mainsoft" (e)........................................         86      1,656
Myriad Ultra Systems Ltd.--"Myriad" (f).....................................        711
                                                                              ---------  ---------
                                                                                  8,001     12,140
                                                                              ---------  ---------
                                                                              ---------  ---------
</TABLE>

------------------------

(a) The Company holds 2.9% of the shares offered by Keren Shakim. The main
    activity of Keren Shakim is investment in business and securities. Its
    investments consist mainly of long and medium term investments, primarily in
    Israel. The investment as of December 31, 1997 presented net of write-down
    of adjusted NIS 1,018,000.

(b) Mahalachim is a venture capital fund. The Company holds shares conferring
    upon it a 5% holding in this company. The investment as of December 31, 1997
    is presented net of write-down of adjusted NIS 1,950,000.

(c) The Company holds preferred shares convertible into ordinary shares,
    conferring upon it a 21.36% holding in this company. Carmel is engaged in
    development of products for measurement of the concentration of glucose in
    the blood without using the present mechanical methods.

   At December 31, 1997 and 1996, the investment is presented net of write-down
    of adjusted NIS 3,174,000 and adjusted NIS 2,822,000, respectively.

(d) The Company holds shares conferring upon it 0.2% in Industrial Buildings.
    The Company does not account for these shares by the equity method because
    of immateriality (see also note 3d(2)).

(e) The Company holds shares conferring upon it 4.3% in Mainsoft. Mainsoft is
    engaged in the development, production and marketing of software and
    development tools for developers of software.

   At December 31, 1997 and 1996, the investment is presented net of write-down
    of adjusted NIS 2,640,000 and adjusted NIS 1,070,000, respectively.

(f) In April 1997, the Company purchased shares conferring upon it 4.4% in
    Myriad and received an option to purchase additional 2.2% for adjusted NIS
    1,552,000.

   Myriad is engaged in the development, production and marketing of instruments
    for the measuring, by ultra-sound, of bone density and elasticity.

   At December 31, 1997, the investment is presented net of write-down of
    adjusted NIS 841,000.


                                      152
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--FIXED ASSETS:

A. COMPOSITION OF ASSETS, GROUPED BY MAJOR CLASSIFICATIONS, AND CHANGES THEREIN
   DURING 1997, ARE AS FOLLOWS:

<TABLE>
<CAPTION>
                                                       COST                                ACCUMULATED DEPRECIATION
                               ----------------------------------------------------  -------------------------------------
                                                          IN RESPECT
                                                              OF
                               BALANCE AT    ADDITIONS    RETIREMENTS     BALANCE    BALANCE AT    ADDITIONS     BALANCE
                                BEGINNING     DURING      DURING THE      AT END      BEGINNING     DURING       AT END
                                 OF YEAR     THE YEAR        YEAR         OF YEAR      OF YEAR     THE YEAR      OF YEAR
                               -----------  -----------  -------------  -----------  -----------  -----------  -----------
                                                                ADJUSTED NIS IN THOUSANDS
                               -------------------------------------------------------------------------------------------
<S>                            <C>          <C>          <C>            <C>          <C>          <C>          <C>
CONSOLIDATED:
  Building--leased out
    (including land).........      61,719                                   61,719       17,370          940       18,310
  Buildings under
    construction (including
    land)*...................      93,292       30,375        27,819        95,848
  Machinery and equipment....         433          254                         687           42           59          101
  Vehicles...................          83           99                         182            4           17           21
  Office furniture and
    equipment (including
    computer and peripheral
    equipment)...............          85           37                         122           22           19           41
                               -----------  -----------       ------    -----------  -----------       -----   -----------
                                  155,612       30,765        27,819       158,558       17,438        1,035       18,473
                                            -----------       ------                 -----------       -----   -----------
                                            -----------       ------                 -----------       -----   -----------
Less--buildings under
  construction designated for
  sale, see b. below.........      25,981                                   61,637
                               -----------                              -----------
                                  129,631                                   96,921
                               -----------                              -----------
                               -----------                              -----------
THE COMPANY:
  Building under construction
    (including land)**.......      67,311       28,541                      95,852
  Machinery and equipment....         433          254                         687           42           59          101
  Office furniture and
    equipment (including
    computer and peripheral
    equipment)...............          85           37                         122           22           19           41
                               -----------  -----------                 -----------  -----------       -----   -----------
                                   67,829       28,832                      96,661           64           78          142
                               -----------  -----------                              -----------       -----   -----------
                               -----------  -----------                              -----------       -----   -----------
  Less--building under
    construction designated
    for sale, see b. below...                                               61,637
                                                                        -----------
                                                                            35,024
                                                                        -----------
                                                                        -----------

<CAPTION>

                                   DEPRECIATED
                                    BALANCE AT
                                   DECEMBER 31
                               --------------------
                                 1997       1996
                               ---------  ---------
                                 ADJUSTED NIS IN
                                    THOUSANDS
                               --------------------
<S>                            <C>        <C>
CONSOLIDATED:
  Building--leased out
    (including land).........     43,409     44,349
  Buildings under
    construction (including
    land)*...................     95,848     93,292
  Machinery and equipment....        586        391
  Vehicles...................        161         79
  Office furniture and
    equipment (including
    computer and peripheral
    equipment)...............         81         63
                               ---------  ---------
                                 140,085    138,174

Less--buildings under
  construction designated for
  sale, see b. below.........     61,637     25,981
                               ---------  ---------
                                  78,448    112,193
                               ---------  ---------
                               ---------  ---------
THE COMPANY:
  Building under construction
    (including land)**.......     95,852     67,311
  Machinery and equipment....        586        391
  Office furniture and
    equipment (including
    computer and peripheral
    equipment)...............         81         63
                               ---------  ---------
                                  96,519     67,765

  Less--building under
    construction designated
    for sale, see b. below...     61,637
                               ---------
                                  34,882     67,765
                               ---------  ---------
                               ---------  ---------
</TABLE>

------------------------

*   Including financial expenses capitalized at December 31, 1997 and 1996
    -adjusted NIS 2,192,000 and adjusted NIS 2,721,000, respectively.

*   Including financing expenses capitalized at December 31, 1997 and 1996
    -adjusted NIS 2,192,000 and adjusted NIS 1,595,000, respectively.


                                      153
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--FIXED ASSETS (CONTINUED):
B. THE COMPANIES' RIGHTS IN REAL ESTATE ARE AS FOLLOWS:

<TABLE>
<CAPTION>
                                                                                  COST              ACCUMULATED
                                                                          --------------------  DEPRECIATION
                                                                              DECEMBER 31           DECEMBER 31
                                                                          --------------------  --------------------
                                                                            1997       1996       1997       1996
                                                                          ---------  ---------  ---------  ---------
<S>                                                                       <C>        <C>        <C>        <C>
                                                                                  ADJUSTED NIS IN THOUSANDS
                                                                          ------------------------------------------
The Company:
  Land jointly leased with another company for 44 years ending October
    31, 2037--the Company's share--70%(1)...............................     34,215     20,444
  Building under construction, jointly owned with an interested party
    and another company--the Company's share-33%(2).....................     61,637     46,867
                                                                          ---------  ---------
    Total--the Company..................................................     95,852     67,311
                                                                          ---------  ---------
Merkazim:
  Buildings (including under construction) on freehold land.............     10,133     36,118      3,221      3,029
  Buildings jointly owned with an interested party--Merkazim's
    share--50%..........................................................     10,152     10,152      2,429      2,260
  Buildings on land leased for 49 years ending March 24, 2022-- 80% of
    lease fees are capitalized..........................................     25,932     25,932      6,972      6,575
  Buildings on land leased for 49 years ending March 31, 2025-- 80% of
    lease fees are capitalized..........................................      5,217      5,217      1,442      1,371
  Buildings on land leased for 49 years ending March 31, 2021...........     10,281     10,281      4,246      4,135
                                                                          ---------  ---------  ---------  ---------
    Total--Merkazim.....................................................     61,715     87,700     18,310     17,370
                                                                          ---------  ---------  ---------  ---------
    Total--consolidated.................................................    157,567    155,011     18,310     17,370
                                                                          ---------  ---------  ---------  ---------
                                                                          ---------  ---------  ---------  ---------
</TABLE>

------------------------

(1) As to commitments relating to continuation of construction, see note 7a(1).

(2) In February 1997, the Company entered into an agreement with an interested
    party regarding sale of the Company's share in a building under construction
    for approximately NIS 75 million. Since the construction has not yet been
    completed and the eventual costs of completion are not known, it is not
    possible to estimate the anticipated capital gain the Company will derive
    from this transaction. This building is presented among current assets, net
    of advances from purchaser--adjusted NIS 48,195,000.

    The registration of the Company's land in its name in the Land Registry has
not yet been completed.

    The buildings of Merkazim are leased out for long periods (up to 8 years);
    the lessees of some of these buildings have been granted a purchase option
    realizable during, or at termination of, the lease period.


                                      154
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--LONG TERM BANK LOANS:

A. THE LOANS ARE LINKED TO THE ISRAELI CPI AND BEAR INTEREST AT THE ANNUAL RATE
  OF 3.25%-4.4%.

B. THE LOANS MATURE IN THE FOLLOWING YEARS AFTER THE BALANCE SHEET DATES:

<TABLE>
<CAPTION>
                                                                            CONSOLIDATED          THE COMPANY
                                                                        --------------------  --------------------
                                                                            DECEMBER 31           DECEMBER 31
                                                                        --------------------  --------------------
                                                                          1997       1996       1997       1996
                                                                        ---------  ---------  ---------  ---------
                                                                                ADJUSTED NIS IN THOUSANDS
                                                                        ------------------------------------------
<S>                                                                     <C>        <C>        <C>        <C>
First year--current maturities........................................     17,657     17,796     15,888     16,030
                                                                        ---------  ---------  ---------  ---------
Second year...........................................................     21,794     19,479     20,012     17,995
Third year............................................................      7,130     21,278      5,348     19,794
Fourth year...........................................................      7,130      6,774      5,348      5,289
Fifth year............................................................      7,130      6,774      5,348      5,289
Sixth year and thereafter (through 2012)..............................     71,336     78,642     53,500     58,132
                                                                        ---------  ---------  ---------  ---------
                                                                          114,520    132,947     89,556    106,499
                                                                        ---------  ---------  ---------  ---------
                                                                          132,177    150,743    105,444    122,529
                                                                        ---------  ---------  ---------  ---------
                                                                        ---------  ---------  ---------  ---------
</TABLE>

C. AS TO PLEDGES TO SECURE THE LOANS AND LIMITATIONS RELATING TO THEM, SEE NOTE
  7C.

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

A. COMMITMENTS:

1)  In August 1994, the Company and a third party established a joint venture
    for the erection of an industrial and commercial building on jointly
    purchased land. The Company's share in the joint venture is 70%. The
    estimated cost of the erection of the building is approximately $15 million,
    see note 5b.

2)  In 1994, the Company and an interested party acquired 50% of a lot for the
    purpose of construction of an office building. The Company's share in this
    land is 33%. The construction was carried out as a joint venture between the
    parties. In February 1997, the Company and the other parties to the joint
    venture entered into an agreement for sale of the building, see note 5b(2).

   After the agreement was signed, the Company received notice from a third
    party, claiming that the Company had undertaken to lease premises in the
    building to that third party. The Company rejected this claim, since, in the
    opinion of the Company's legal counsel, the negotiations with the third
    party were not concluded and no legal obligation was created.

3)  The Company is committed to invest approximately adjusted NIS 5,324,000 in a
    joint venture (see also note 3d(7)) with interested parties and others (the
    Company's share is 10%). The joint venture will acquire land for
    construction of buildings for lease. The Company's share in the cost of the
    buildings is approximately $30 million.


                                      155
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 7-- COMMITMENTS, CONTINGENT LIABILITIES, PLEDGES AND LIMITATIONS IN RESPECT
        OF LIABILITIES (CONTINUED):
4)  In December 1996, the subsidiary New Horizons acquired real estate (intended
    for sale) from an interested party which holds 20% of New Horizons' shares.
    The selling company will be entitled to 90% of the profits from the
    subsequent sale of the real estate, with the balance accruing to New
    Horizons. The registration of the real estate in New Horizons' name in the
    Land Registry has not yet been completed.

B. CONTINGENT LIABILITIES:

    1) The Company and Merkazim have each provided guarantees to secure the
    long-term bank loans of the other.

    2) The Company has provided a guarantee to a bank to secure a long-term loan
    received by Merkazim.

    3) In August 1997, the Company received a land appreciation tax assessment
    in the amount of approximately adjusted NIS 6.8 million in respect of sale
    of its share in a building being erected by a joint venture to which the
    Company is a party. The Company is contesting this assessment. Since the
    difference between the amount of tax under the Company's own assessment and
    the assessment of the tax authorities is mainly due to non-recognition of
    future construction expenses, management is of the opinion that the Company
    will not incur additional expenses in respect of this assessment. Therefore,
    the Company did not make any further provision in its accounts in respect of
    this assessment.

    4) In June 1997, Merkazim received an assessment from the land appreciation
    tax authorities for adjusted NIS 1,661,000 in respect of sale of an asset in
    Kiryat Arieh in Petah Tikva. Merkazim is contesting this assessment. Since
    the difference between the amount of tax under Merkazim's own assessment and
    the assessment of the tax authorities is mainly due to non-recognition of
    future construction expenses, management is of the opinion that Merkazim
    will not incur additional expenses in respect of this assessment. Therefore,
    Merkazim did not make any further provision in its accounts in respect of
    this assessment.

    5) In March 1995, a lawsuit for a commission of approximately adjusted NIS
    640,000 in respect of acquisition of real estate was brought against the
    Company. In management's opinion, this suit is without merit, so that the
    Company will not incur any expenses in respect thereof. Therefore, the
    Company did not make any provision in respect of the claim.

    6) The Company has provided guarantees for 10% of the debts of an associated
    Company to banks. The guarantee is limited to adjusted NIS 106 million ($ 30
    million), see a(3) above and note 3d(7).

C. PLEDGES AND RESTRICTIONS IN RESPECT OF LIABILITIES:

    1) To secure repayment of long-term and short-term loans from a bank in a
    total amount at Decmber 31, 1997 of adjusted NIS 106,964,000--consolidated
    and adjusted NIS 80,221,000--the Company, the Company and Merkazim have
    undertaken the following obligations towards the bank:

       a) Any amount due the Company or Merkazim from their investment in the
       associated company, Mivnat, will be first used to repay the loans.


                                      156
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 7-- COMMITMENTS, CONTINGENT LIABILITIES, PLEDGES AND LIMITATIONS IN RESPECT
        OF LIABILITIES (CONTINUED):
       b) The Company's shareholders' equity will not fall below adjusted NIS 65
       million, the total consolidated liabilities will not go over 3.25 times
       the shareholders' equity and the annual net income will not fall below an
       average of adjusted NIS 6.3 million for the three preceding years.

    2) Limitations similar to those mentioned in (1) (b) above, but with
    different amounts, were also imposed on other shareholders of Mivnat in
    respect of the loans they received. If they do not uphold the limitations,
    the lenders will consider it a breach of the terms of the loans by the
    Company as well.

    3) Furthermore, the Company, Merkazim and other shareholders in Mivnat
    (interested parties) have assured the bank that their holdings in Mivnat
    will not at any time fall below 50% of the issued and paid share capital of
    Mivnat. They also agreed, among other things to ensure that Mivnat holds
    directly, at all times, not less than 50.1% of the issued share capital of
    Industrial Buildings.

    The bank agreed that, subject to certain conditions, the holding of Mivnat
    in Industrial Buildings may fall, but not below 37% (fully diluted).

    4) To further secure repayment of the loans, the Company and Merkazim have
    mortgaged all their assets and rights in Mivnat.

    5) To secure repayment of long and short-term bank loans, designated for
    financing a building under cosntruction in Netanya, the balance of which is
    adjusted NIS 4,212,000 as of December 31, 1997, the Company mortgaged its
    rights in the building.

NOTE 8--SHARE CAPITAL

    Composed at December 31, 1997 and 1996 as follows:

<TABLE>
<CAPTION>
                                                                       NUMBER OF SHARES          AMOUNT IN NIS
                                                                    ----------------------  -----------------------
<S>                                                                 <C>          <C>        <C>          <C>
                                                                                  ISSUED                   ISSUED
                                                                    AUTHORIZED   AND PAID   AUTHORIZED    AND PAID
                                                                    -----------  ---------  -----------  ----------
Ordinary shares of NIS 0.001 par value............................     160,000     100,000    160.0000     100.0000
                                                                    -----------  ---------  -----------  ----------
                                                                    -----------  ---------  -----------  ----------
Deferred shares of NIS 0.0001 par value*..........................           3           3      0.0003       0.0003
                                                                    -----------  ---------  -----------  ----------
                                                                    -----------  ---------  -----------  ----------
</TABLE>

------------------------

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

NOTE 9--TAXES ON INCOME:

A. MEASUREMENT OF RESULTS FOR TAX PURPOSES UNDER THE INCOME TAX (INFLATIONARY
  ADJUSTMENTS) LAW, 1985

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


                                      157
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--TAXES ON INCOME (CONTINUED):
B. DEFERRED INCOME TAXES:

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

<TABLE>
<CAPTION>
                                                             CONSOLIDATED                               THE COMPANY
                                        ------------------------------------------------------  ----------------------------
                                                         BUILDINGS                                BUILDINGS
                                                           UNDER                                    UNDER
                                                       CONSTRUCTION,   MARKETABLE               CONSTRUCTION,   MARKETABLE
                                                          NET OF       SECURITIES                  NET OF       SECURITIES
                                         DEPRECIABLE     ADVANCES      CLASSIFIED                 ADVANCES      CLASSIFIED
                                            FIXED          FROM         AS "FIXED                   FROM         AS "FIXED
                                           ASSETS*      PURCHASERS       ASSETS"       TOTAL     PURCHASERS       ASSETS"
                                        -------------  -------------  -------------  ---------  -------------  -------------
                                                                     ADJUSTED NIS IN THOUSANDS
                                        ------------------------------------------------------------------------------------
<S>                                     <C>            <C>            <C>            <C>        <C>            <C>
Balance at January 1, 1996............        1,128                         1,182        2,310                       1,182
Changes in 1996--amounts carried to
  income..............................          261         (4,921)          (234)      (4,894)                       (234)
                                              -----         ------          -----    ---------                       -----
Balance at December 31, 1996..........        1,389         (4,921)           948       (2,584)                        948
Changes in 1997--amounts carried to
  income..............................         (241)           161          1,917        1,837       (4,760)         1,917
                                              -----         ------          -----    ---------       ------          -----
Balance at December 31, 1997..........        1,148         (4,760)         2,865         (747)      (4,760)         2,865
                                              -----         ------          -----    ---------       ------          -----
                                              -----         ------          -----    ---------       ------          -----

<CAPTION>
                                          TOTAL
                                        ---------

<S>                                     <C>
Balance at January 1, 1996............      1,182
Changes in 1996--amounts carried to
  income..............................       (234)
                                        ---------
Balance at December 31, 1996..........        948
Changes in 1997--amounts carried to
  income..............................     (2,843)
                                        ---------
Balance at December 31, 1997..........     (1,895)
                                        ---------
                                        ---------
</TABLE>

------------------------

*   Taking into account the provisions of Opinion 40 of the Israeli Institute,
    see c. below.

    2) Deferred taxes are presented in the balance sheets as follows:
<TABLE>
<CAPTION>
                                                                 CONSOLIDATED           THE COMPANY
                                                             --------------------  ----------------------
                                                                 DECEMBER 31            DECEMBER 31
                                                             --------------------  ----------------------
                                                               1997       1996       1997        1996
                                                             ---------  ---------  ---------     -----
                                                                      ADJUSTED NIS IN THOUSANDS
                                                             --------------------------------------------
<S>                                                          <C>        <C>        <C>        <C>
Among current liabilities (current assets).................     (1,895)    (3,973)    (1,895)        948
Among long-term liabilities................................      1,148      1,389
                                                             ---------  ---------  ---------         ---
Balance--net*..............................................       (747)    (2,584)    (1,845)        948
                                                             ---------  ---------  ---------         ---
                                                             ---------  ---------  ---------         ---
</TABLE>

------------------------

*   Realization of this deferred tax balance is conditional upon earning, in the
    coming years, taxable income in an appropriate amount.

    3) The deferred taxes are computed at the rate of 36%.

C. UNDEPRECIATED BALANCE OF COST OF FIXED ASSETS--THE PORTION IN RESPECT OF
  WHICH DEFERRED TAXES HAVE NOT BEEN PROVIDED

    The balance of undepreciated cost of certain depreciable fixed assets
    includes the amounts detailed below which will not be allowed for tax
    purposes by way of depreciation or as cost upon realization of


                                      158
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--TAXES ON INCOME (CONTINUED):
    the assets. These amounts are regarded as permanent differences (in respect
    of which no deferred taxes are to be provided) in accordance with Opinion 40
    of the Israeli Institute:

<TABLE>
<CAPTION>
                                                                                 CONSOLIDATED
                                                                             --------------------
                                                                               1997       1996
                                                                             ---------  ---------
                                                                               ADJUSTED NIS IN
                                                                                  THOUSANDS
                                                                             --------------------
<S>                                                                          <C>        <C>
Balance at beginning of year...............................................     22,998     23,502
Decrease in the above balance due to depreciation charge for the year......     (4,301)      (504)
                                                                             ---------  ---------
Balance at end of year.....................................................     18,697     22,998
                                                                             ---------  ---------
                                                                             ---------  ---------
</TABLE>

D. TAXES ON INCOME INCLUDED IN THE INCOME STATEMENTS:

    1) As follows:

<TABLE>
<CAPTION>
                                                                       1997       1996       1995
                                                                    ---------  ---------  ---------
<S>                                                                 <C>        <C>        <C>
                                                                       ADJUSTED NIS IN THOUSANDS
                                                                    -------------------------------
Consolidated:
  Current.........................................................     29,170     11,037      4,062
  Deferred, see also b. above.....................................      1,837     (4,894)      (600)
                                                                    ---------  ---------  ---------
                                                                       31,007      6,143      3,462
                                                                    ---------  ---------  ---------
                                                                    ---------  ---------  ---------
The Company:
  Current.........................................................     28,460      5,448      3,468
  Deferred, see also b. above.....................................     (2,843)      (234)      (735)
                                                                    ---------  ---------  ---------
                                                                       25,617      5,214      2,733
                                                                    ---------  ---------  ---------
                                                                    ---------  ---------  ---------
</TABLE>

    Current taxes are computed at the tax rates applicable to companies: 1997
    and 1996--36%; 1995-- 37%.

    2) Following is a reconciliation of the theoretical tax expense, assuming
       all income is taxed at the regular tax rates applicable to companies in
       Israel (see (1) above), and the actual tax expense:

<TABLE>
<CAPTION>
                                                                                         1997       1996       1995
                                                                                       ---------  ---------  ---------
<S>                                                                                    <C>        <C>        <C>
                                                                                          ADJUSTED NIS IN THOUSANDS
                                                                                       -------------------------------
Consolidated:
  Income before taxes on income as reported in the income statements.................    139,460     35,033      9,085
  Less--share in profits of associated companies--net................................      8,608     11,209      3,481
                                                                                       ---------  ---------  ---------
  Balance--income....................................................................    130,852     23,824      5,604
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
  Theoretical tax expense............................................................     47,107      8,577      2,073
  Increase (decrease) in taxes resulting from permanent differences--the tax effect:
    Disallowable deductions..........................................................      2,113      3,626        628
</TABLE>


                                      159
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--TAXES ON INCOME (CONTINUED):

<TABLE>
<CAPTION>
                                                                                         1997       1996       1995
                                                                                       ---------  ---------  ---------
                                                                                          ADJUSTED NIS IN THOUSANDS
                                                                                       -------------------------------
<S>                                                                                    <C>        <C>        <C>
    Taxes on dividends received from associated company..............................        276      1,767        896
    Income taxed at different tax rates:
      Gain from sale of a building...................................................      1,919
      Gain on sale of shares in an associated company................................    (18,005)    (1,582)
    Tax exempt income--decrease in shareholding in associated companies following
      issuance of their shares to a third party......................................     (2,427)    (7,239)      (245)
    Sundry--net*.....................................................................         24        994        (67)
  Increase in taxes in respect of inflationary deduction and tax losses incurred in
    the reported year for which deferred taxes were not provided.....................                              177
                                                                                       ---------  ---------  ---------
  Taxes on income for the reported year..............................................     31,007      6,143      3,462
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
The Company:
  Income before taxes on income, as reported in the income statements................    134,070     34,104      8,356
  Less--profits of subsidiaries and share in profits of associated companies--net....     12,420     11,270      4,328
                                                                                       ---------  ---------  ---------
  Balance--income....................................................................    121,650     22,834      4,028
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
  Theoretical tax expense............................................................     43,794      8,220      1,490
  Increase (decrease) in taxes resulting from permanent differences--the tax effect:
    Disallowable deductions..........................................................      2,063      2,538        452
    Taxes on dividends received from associated company..............................        207      1,308        701
    Income taxed at different tax rate--gain from sale of associated company.........    (18,005)    (1,582)
    Tax exempt income--decrease in shareholding in associated companies following
      issuance of their shares to a third party......................................     (2,427)    (7,239)      (245)
    Sundry--net*.....................................................................        (15)     1,969         65
  Increase in taxes in respect of inflationary deduction and tax losses incurred in
    the reported year for which deferred taxes were not provided.....................                              270
                                                                                       ---------  ---------  ---------
  Taxes on income for the reported year..............................................     25,617      5,214      2,733
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>

------------------------

*   Resulting mainly from the difference in computation of linkage to the
    Israeli CPI for financial statement and tax purposes.


                                      160
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--TAXES ON INCOME (CONTINUED):
E. TAX LIABILITY RELATING TO LONG-TERM LEASE OF BUILDINGS

    In March 1993, Merkazim notified the tax authorities that it has leased
    buildings for a ten year period and that options to extend the leases for a
    further ten year period or to purchase the property at the end of the
    original lease period were granted to companies related to the original
    lessees at the time of signing the leases.

    The Company received a legal opinion stating that the above leases are
    subject to income tax and not land appreciation tax. Merkazim reported to
    the tax authorities on this basis.

    Based on the abovementioned legal opinion, management of Merkazim is of the
    opinion that no additional tax liability will arise in respect of this
    matter.

F. TAX ASSESSMENTS

    The Company has received final tax assessments through tax year 1995.

    Maoz has received final tax assessments through tax year 1990. Ophir
    Financing Ltd. has received final tax assessments through tax year 1987.
    Merkazim has received final tax assessments through tax year 1995. New
    Horizons has not been assessed for tax purposes since incorporation.


                                      161
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 10-- TRANSACTIONS AND BALANCES WITH INTERESTED PARTIES
        AND RELATED PARTIES:

A. TRANSACTIONS WITH INTERESTED PARTIES AND RELATED PARTIES:

<TABLE>
<CAPTION>
                                                                                           1997       1996       1995
                                                                                         ---------  ---------  ---------
<S>                                                                                      <C>        <C>        <C>
                                                                                            ADJUSTED NIS IN THOUSANDS
                                                                                         -------------------------------
Income (expenses):
  Consolidated:
    Lease fees for buildings--from interested parties (1)..............................      3,180      3,243      3,174
                                                                                         ---------  ---------  ---------
                                                                                         ---------  ---------  ---------
    Interest accrued on a capital note of an associated company........................        126        181        263
                                                                                         ---------  ---------  ---------
                                                                                         ---------  ---------  ---------
    Management fees from an associated company.........................................      1,272      1,192      1,017
                                                                                         ---------  ---------  ---------
                                                                                         ---------  ---------  ---------
      General and administrative expenses:
        Management fees to shareholders (2 companies) (2) (3)..........................     (1,076)    (9,884)      (984)
                                                                                         ---------  ---------  ---------
                                                                                         ---------  ---------  ---------
      Lease fees in respect of Validor Hotel in Herzlia (1)............................                  (164)      (779)
      Less--income from sublease of the above hotel to a bank-interested party (1).....                   164        779
                                                                                                    ---------  ---------
                                                                                                    ---------  ---------
                                                                                                          -,-        -,-
                                                                                                    ---------  ---------
                                                                                                    ---------  ---------
    Financial expenses--to a bank-interested party--net................................        398       (369)      (140)
                                                                                         ---------  ---------  ---------
                                                                                         ---------  ---------  ---------
    Salary to related party employed by the Company....................................      1,006
                                                                                         ---------
                                                                                         ---------

<CAPTION>
                                                                                           1997       1996       1995
                                                                                         ---------  ---------  ---------
<S>                                                                                      <C>        <C>        <C>
                                                                                            ADJUSTED NIS IN THOUSANDS
                                                                                         -------------------------------
The Company:
  Interest accrued on a capital note of an associated company..........................        126        181        263
                                                                                         ---------  ---------  ---------
                                                                                         ---------  ---------  ---------
  Management fees from a subsidiary and an associated company..........................      1,182      1,103      1,105
                                                                                         ---------  ---------  ---------
                                                                                         ---------  ---------  ---------
  General and administrative expenses:
    Lease fees in respect of Validor Hotel in Herzlia (1)..............................                  (164)      (779)
    Less--income from sublease of the above hotel to a bank-interested party (1).......                   164        779
                                                                                                    ---------  ---------
                                                                                                          -,-        -,-
                                                                                                    ---------  ---------
                                                                                                    ---------  ---------
  Financial expenses--to a bank-interested party--net..................................       (407)      (369)      (140)
                                                                                         ---------  ---------  ---------
                                                                                         ---------  ---------  ---------
  Salary to related party employed by the Company......................................      1,006
                                                                                         ---------
                                                                                         ---------
</TABLE>

------------------------

(1) In management's opinion, the lease fees are similar to those generally
    prevailing for similar leases.

(2) See also note 1a(1).

(3) The management fees are paid at the end of each quarter in a fixed amount
    linked to the Israeli CPI in accordance with a shareholders' agreement.

As to agreement for sale of building to an interested party, see note 5b(2).


                                      162
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 10-- TRANSACTIONS AND BALANCES WITH INTERESTED PARTIES
        AND RELATED PARTIES (CONTINUED):
As to other transactions with, and commitments to, interested parties, see note
7.

B. BALANCES WITH INTERESTED PARTIES AND RELATED PARTIES:

1) Current receivables:

<TABLE>
<CAPTION>
                                                                                                     DECEMBER 31
                                                                                                 --------------------
                                                                                                   1997       1996
                                                                                                 ---------  ---------
                                                                                                   ADJUSTED NIS IN
                                                                                                      THOUSANDS
                                                                                                 --------------------
<S>                                                                                              <C>        <C>
    Consolidated:
      a) Cash and cash equivalents:
        Balance at balance sheet date..........................................................     35,559        145
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
  Highest balance during the year..............................................................     68,905      4,334
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
      b) Short-term loans to associated companies*.............................................     12,216      9,616
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
    The Company:
      a) Cash and cash equivalents:
        Balance at balance sheet date..........................................................     35,319        138
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
  Highest balance during the year..............................................................     68,828      4,270
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
      b) Short-term loans to associated companies and subsidiaries*............................     37,501     54,225
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
</TABLE>

------------------------

As to current balances with associated companies, see note 12b.

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

2)  Capital notes from shareholders

    The capital notes were unlinked and bore annual interest of NIS 1. They were
    repaid on January 1, 1997.

3)  Current liabilities--short-term loans from shareholders

    At December 31, 1996, the loans were linked to the Israeli CPI and bore
    interest at the annual rate of 2.9%-4%. The loans were repaid during 1997.

4)  Long-term liabilities--payables in respect of acquisition of land--business
    inventory--the liability is linked to the Israeli CPI and bears no interest.

C.  As to the land designated for building--jointly owned with an interested
    party, see note 5b.

D.  As to investments in associated companies, some of which are interested
    parties, see note 3.

E.  As to investments in quoted shares of an interested party, see note 12a.

F.  In the ordinary course of business, the Company carries out transactions
    with entities that are, or could be, included in the definition of
    interested parties because of their connection with a bank that is an


                                      163
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 10-- TRANSACTIONS AND BALANCES WITH INTERESTED PARTIES
        AND RELATED PARTIES (CONTINUED):
   interested party in the Company. In view of the above, it is impractical to
   record the transactions with such entities separately and, therefore, no
   information thereon is given in these financial statements. Management is of
   the opinion, in view of Company procedures and their implementation, that
   such transactions were carried out in the ordinary course of business and at
   prices and credit terms that do not differ from those generally prevailing on
   the market.

NOTE 11--LINKAGE OF MONETARY BALANCES:

A. AS FOLLOWS:

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31, 1997
                                                                     ----------------------------------------------
                                                                       IN, OR
                                                                      LINKED TO     LINKED
                                                                         THE        TO THE
                                                                     U.S. DOLLAR  ISRAELI CPI  UNLINKED     TOTAL
                                                                     -----------  -----------  ---------  ---------
                                                                               ADJUSTED NIS IN THOUSANDS
                                                                     ----------------------------------------------
<S>                                                                  <C>          <C>          <C>        <C>
Consolidated:
  Assets:
    Current assets:
      Cash and cash equivalents....................................       9,896                   29,260     39,156
      Short-term loans receivable from associated companies........                   12,216                 12,216
      Short-term investments.......................................                    5,177         150      5,327
      Accounts receivable..........................................                                3,626      3,626
    Long-term bank deposit.........................................                   10,353                 10,353
                                                                     -----------  -----------  ---------  ---------
                                                                          9,896       27,746      33,036     70,678
                                                                     -----------  -----------  ---------  ---------
                                                                     -----------  -----------  ---------  ---------
  Liabilities:
    Current liabilities:
      Short-term bank credit.......................................                    4,222                  4,222
      Accounts payable and accruals................................                                7,206      7,206
      Dividend payable.............................................                               25,000     25,000
    Long-term liabilities:
      Payables in respect of acquisition of land--business
        inventory..................................................                   12,026                 12,026
      Long-term bank loans (including current maturities)..........                  132,177                132,177
                                                                                  -----------  ---------  ---------
                                                                                     148,425      32,206    180,631
                                                                                  -----------  ---------  ---------
                                                                                  -----------  ---------  ---------
</TABLE>


                                      164
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--LINKAGE OF MONETARY BALANCES (CONTINUED):

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31, 1997
                                                                     ----------------------------------------------
                                                                       IN, OR
                                                                      LINKED TO     LINKED
                                                                         THE        TO THE
                                                                     U.S. DOLLAR  ISRAELI CPI  UNLINKED     TOTAL
                                                                     -----------  -----------  ---------  ---------
                                                                               ADJUSTED NIS IN THOUSANDS
                                                                     ----------------------------------------------
<S>                                                                  <C>          <C>          <C>        <C>
The Company:
  Assets:
    Current assets:
      Cash and cash equivalents....................................       9,896                   28,967     38,863
      Short-term loans receivable from associated companies and
        from subsidiaries..........................................                   37,501                 37,501
      Short-term investments.......................................                    5,177         150      5,327
      Accounts receivable..........................................                                  555        555
    Long-term bank deposit.........................................                   10,353                 10,353
                                                                     -----------  -----------  ---------  ---------
                                                                          9,896       53,031      29,672     92,599
                                                                     -----------  -----------  ---------  ---------
                                                                     -----------  -----------  ---------  ---------
  Liabilities:
    Current liabilities:
    Short-term bank credit.........................................                    4,212                  4,212
    Accounts payable and accruals..................................                                6,789      6,789
    Dividend payable...............................................                               25,000     25,000
  Long-term bank loans (including current maturities)..............                  105,444                105,444
                                                                                  -----------  ---------  ---------
                                                                                  -----------  ---------  ---------
                                                                                     109,656      31,789    141,445
                                                                                  -----------  ---------  ---------
                                                                                  -----------  ---------  ---------
</TABLE>

B. DATA REGARDING THE EXCHANGE RATE AND THE ISRAELI CPI:

<TABLE>
<CAPTION>
                                                                                    EXCHANGE RATE
                                                                                       OF ONE          ISRAELI
                                                                                     U.S.DOLLAR          CPI*
                                                                                   ---------------  --------------
<S>                                                                                <C>              <C>
At end of year:
  1997...........................................................................      NIS 3.536    153.1 points
  1996...........................................................................      NIS 3.251    143.1 points
  1995...........................................................................      NIS 3.135    129.4 points
  1994...........................................................................      NIS 3.018    119.7 points
Increase during the year:
  1997...........................................................................           8.8%    7.0%
  1996...........................................................................           3.7%    10.6%
  1995...........................................................................           3.9%    8.1%
</TABLE>

------------------------

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


                                      165
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 12--SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:

BALANCE SHEETS:

<TABLE>
<CAPTION>
                                                                                 CONSOLIDATED          THE COMPANY
                                                                             --------------------  --------------------
                                                                                 DECEMBER 31           DECEMBER 31
                                                                             --------------------  --------------------
                                                                               1997       1996       1997       1996
                                                                             ---------  ---------  ---------  ---------
                                                                                     ADJUSTED NIS IN THOUSANDS
                                                                             -------------------------------------------
<S>                                                                          <C>        <C>        <C>        <C>
A. SHORT-TERM INVESTMENTS:

  DSP Group, Inc. -quoted shares...........................................                 5,485                 5,485
  Quoted shares of an interested party.....................................        150        102        150        102
  Bank deposit*............................................................      5,177                 5,177
                                                                             ---------  ---------  ---------  ---------
                                                                                 5,327      5,587      5,327      5,587
                                                                             ---------  ---------  ---------  ---------
                                                                             ---------  ---------  ---------  ---------
B. ACCOUNTS RECEIVABLE:

  Associated companies.....................................................        134        671        134        671
  Other....................................................................      3,492      2,730        421        421
                                                                             ---------  ---------  ---------  ---------
                                                                                 3,626      3,401        555      1,092
                                                                             ---------  ---------  ---------  ---------
                                                                             ---------  ---------  ---------  ---------
</TABLE>

------------------------

*   The deposit is linked to the Israeli CPI and bears annual interest at the
    rate of 4.55%.

C. LONG-TERM BANK DEPOSIT

    The deposit is linked to the Israeli CPI, bears annual interest at the rate
of 4.5% and is repayable in twelve equal quarterly payments beginning September
1999.

<TABLE>
<CAPTION>
                                                                                 CONSOLIDATED          THE COMPANY
                                                                             --------------------  --------------------
                                                                                 DECEMBER 31           DECEMBER 31
                                                                             --------------------  --------------------
                                                                               1997       1996       1997       1996
                                                                             ---------  ---------  ---------  ---------
                                                                                     ADJUSTED NIS IN THOUSANDS
                                                                             ------------------------------------------
<S>                                                                          <C>        <C>        <C>        <C>
D. BANK CREDIT:

  Short-term credit*.......................................................      4,222     27,316      4,212     26,938
  Current maturities of long-term loans, see note 6........................     17,657     17,796     15,888     16,030
                                                                             ---------  ---------  ---------  ---------
                                                                                21,879     45,112     20,100     42,968
                                                                             ---------  ---------  ---------  ---------
                                                                             ---------  ---------  ---------  ---------
</TABLE>

------------------------

*   The interest rate at December 31, 1997 is 5.32%.


                                      166
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 12--SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (CONTINUED):
E. ACCOUNTS PABYABLE AND ACCRUALS:

<TABLE>
<CAPTION>
                                                                                 CONSOLIDATED          THE COMPANY
                                                                             --------------------  --------------------
                                                                                 DECEMBER 31           DECEMBER 31
                                                                             --------------------  --------------------
                                                                               1997       1996       1997       1996
                                                                             ---------  ---------  ---------  ---------
                                                                                     ADJUSTED NIS IN THOUSANDS
                                                                             ------------------------------------------
<S>                                                                          <C>        <C>        <C>        <C>
Trade......................................................................      1,578      2,081      1,578      1,571
Accrued expenses...........................................................      1,457        167      1,040         64
Government of Israel.......................................................        222      3,826        222      2,430
Other......................................................................      9,084      6,227      9,084         38
                                                                             ---------  ---------  ---------  ---------
                                                                                12,341     12,301     11,924      4,103
                                                                             ---------  ---------  ---------  ---------
                                                                             ---------  ---------  ---------  ---------
</TABLE>

F. CONCENTRATIONS OF CREDIT RISKS

    The group's cash and cash equivalents, short-term investments and long-term
deposit at December 31, 1997 and 1996 were deposited with Israeli banks.

G. FAIR VALUE OF FINANCIAL INSTRUMENTS

    The financial instruments of the group consist of non-derivative assets and
liabilities (including shareholders' equity items, long-term bank deposits and
long-term liabilities).

    In view of their nature, the fair value of financial instruments included in
the working capital of the group is usually identical or close to their carrying
value. The fair value of long-term liabilities also approximates the carrying
value, since they bear interest at rates close to prevailing market rates. As to
the fair value of investments in associated companies the securities of which
are marketable, see note 3.

STATEMENTS OF INCOME:

<TABLE>
<CAPTION>
                                                                                           1997       1996       1995
                                                                                         ---------  ---------  ---------
<S>                                                                                      <C>        <C>        <C>
                                                                                            ADJUSTED NIS IN THOUSANDS
                                                                                         -------------------------------
H. GENERAL AND ADMINISTRATIVE EXPENSES:
  Consolidated:
    Management fees (mainly to shareholders)...........................................      1,076      1,021      1,064
    Payroll and related expenses.......................................................      2,168
    Office rent and maintenance........................................................        263        444        235
    Professional fees..................................................................        702        227        286
    Other..............................................................................        274        485        237
                                                                                         ---------  ---------  ---------
                                                                                             4,483      2,177      1,822
                                                                                         ---------  ---------  ---------
                                                                                         ---------  ---------  ---------
  The Company:
    Payroll and related expenses.......................................................      1,006
    Office rent and maintenance........................................................        263        323        144
    Professional fees..................................................................        490        108        158
    Other..............................................................................        101         47         89
                                                                                         ---------  ---------  ---------
                                                                                             1,860        478        391
                                                                                         ---------  ---------  ---------
                                                                                         ---------  ---------  ---------
</TABLE>


                                      167
<PAGE>

                              OPHIR HOLDINGS LTD.
                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 12--SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (CONTINUED):

<TABLE>
<CAPTION>
                                                                                           1997       1996       1995
                                                                                         ---------  ---------  ---------
                                                                                            ADJUSTED NIS IN THOUSANDS
                                                                                         -------------------------------
<S>                                                                                      <C>        <C>        <C>
I. FINANCIAL EXPENSES--NET:

  Consolidated:
    Expenses:
      In respect of long-term loans....................................................      7,923      6,427      6,299
      In respect of short-term bank credit.............................................      1,739      2,455      1,603
      In respect of short-term loans from shareholders.................................        171      1,444      1,134
      Other............................................................................        141
      Less--financial expenses capitalized to cost of buildings under construction.....       (597)    (1,412)    (1,159)
                                                                                         ---------  ---------  ---------
                                                                                             9,377      8,914      7,877
                                                                                         ---------  ---------  ---------
  Income:
    In respect of long-term bank deposit...............................................        418
    In respect of and short-term loans to associated companies.........................      2,518        569        773
    Other..............................................................................        857        256        490
                                                                                         ---------  ---------  ---------
                                                                                             3,793        825      1,263
                                                                                         ---------  ---------  ---------
                                                                                             5,584      8,089      6,614
                                                                                         ---------  ---------  ---------
                                                                                         ---------  ---------  ---------
  The Company:
    Expenses:
      In respect of long-term bank loans...............................................      5,116      5,190      4,959
      In respect of short-term bank credit.............................................      1,729      2,420      1,603
      In respect of short-term loans from shareholders.................................        171      1,444      1,032
      Other............................................................................        913        843        727
      Less--financial expenses capitalized to cost of buildings under construction.....       (597)      (904)      (691)
                                                                                         ---------  ---------  ---------
                                                                                             7,332      8,993      7,630
                                                                                         ---------  ---------  ---------
  Income:
    In respect of long-term bank deposit...............................................        418
    In respect of short-term loans to subsidiaries and associated companies............      3,546      2,425      2,449
                                                                                         ---------  ---------  ---------
                                                                                             3,964      2,425      2,449
                                                                                         ---------  ---------  ---------
                                                                                             3,368      6,568      5,181
                                                                                         ---------  ---------  ---------
                                                                                         ---------  ---------  ---------
</TABLE>


                                      168
<PAGE>

                              OPHIR HOLDINGS LTD.

                            (AN ISRAELI CORPORATION)

                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 13--NOMINAL DATA OF THE COMPANY:

A.  BALANCE SHEET DATA:

<TABLE>
<CAPTION>
                                                                                                  NOMINAL NIS
                                                                                                  IN THOUSANDS
                                                                                              --------------------
                                                                                                  DECEMBER 31
                                                                                              --------------------
                                                                                                1997       1996
                                                                                              ---------  ---------
<S>                                                                                           <C>        <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................................................     38,863      1,960
  Short-term loans receivable from associated companies and subsidiaries....................     37,501     50,683
  Short-term investments....................................................................      5,327      5,222
  Accounts receivable.......................................................................        555      1,021
  Building under construction, net of advances from purchaser...............................      9,157
  Capital notes from shareholders...........................................................                 8,000
                                                                                              ---------  ---------
                                                                                                 91,403     66,886
                                                                                              ---------  ---------
Investments:
  Associated companies......................................................................    122,206    139,557
  Other companies...........................................................................      4,379      8,213
  Long-term bank deposit....................................................................     10,353
                                                                                              ---------  ---------
                                                                                                136,938    147,770
                                                                                              ---------  ---------
Fixed assets, net of accumulated depreciation...............................................     32,474     59,140
                                                                                              ---------  ---------
                                                                                                260,815    273,796
                                                                                              ---------  ---------
                                                                                              ---------  ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Bank credit...............................................................................     20,100     40,161
  Short-term loans from shareholders........................................................                34,894
  Accounts payable and accruals.............................................................     11,924      3,971
  Dividend payable..........................................................................     25,000
  Deferred income taxes.....................................................................      2,865        884
                                                                                              ---------  ---------
                                                                                                 59,889     79,910
                                                                                              ---------  ---------
Long-term liabilities:
  Bank loans (net of current maturities)....................................................     89,556     99,545
  Excess of Company share in losses of subsidiaries over the investment therein.............     20,190     26,304
                                                                                              ---------  ---------
                                                                                                109,746    125,849
                                                                                              ---------  ---------
    Total liabilities.......................................................................    169,635    205,759
Shareholders' equity, see c. below..........................................................     91,180     68,037
                                                                                              ---------  ---------
                                                                                                260,815    273,796
                                                                                              ---------  ---------
                                                                                              ---------  ---------
</TABLE>


                                      169
<PAGE>

                              OPHIR HOLDINGS LTD.

                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 13--NOMINAL DATA OF THE COMPANY: (CONTINUED)
B.  OPERATING RESULTS DATA:

<TABLE>
<CAPTION>
                                                                                         NOMINAL NIS IN THOUSANDS
                                                                                      -------------------------------
<S>                                                                                   <C>        <C>        <C>
                                                                                        1997       1996       1995
                                                                                      ---------  ---------  ---------
Revenues and gains:
  Share in profits of associated companies--net.....................................      9,812      7,723     *2,177
  Profits of subsidiaries--net......................................................      6,102
  Gain on dilution of holding in associated companies resulting from issuance of
    shares to a third party--net....................................................      6,539     18,356      1,160
  Gain from sale of investments in associated companies.............................    121,787     12,883
  Gain from sale and increase in value of marketable securities--net................      7,102                 8,078
  Dividend received from another company............................................        351        104        241
  Management fees from associated company and from a subsidiary.....................      1,161        994        896
                                                                                      ---------  ---------  ---------
                                                                                        152,854     40,060     12,552
                                                                                      ---------  ---------  ---------
Expenses and losses:
  Losses of subsidiaries--net.......................................................                 4,082      2,353
  Write-down of investment in other companies.......................................      5,600      2,500      1,000
  General and administrative expenses...............................................      1,828        432        316
  Loss from decrease in value of quoted shares--net.................................                 1,748
  Financial expenses--net...........................................................      6,362     14,622     10,315
                                                                                      ---------  ---------  ---------
                                                                                         13,790     23,384     13,984
                                                                                      ---------  ---------  ---------
Income (loss) before taxes on income................................................    139,064     16,676     (1,432)
Taxes on income.....................................................................     25,921      5,000      2,500
                                                                                      ---------  ---------  ---------
Net income (loss) for the year--nominal.............................................    113,143     11,676     (3,932)
                                                                                      ---------  ---------  ---------
                                                                                      ---------  ---------  ---------
</TABLE>

------------------------

*   Restated, see note 1o.


                                      170
<PAGE>

                              OPHIR HOLDINGS LTD.

                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 13--NOMINAL DATA OF THE COMPANY: (CONTINUED)
C.  CHANGES IN SHAREHOLDERS' EQUITY:

<TABLE>
<CAPTION>
                                                                                      NOMINAL NIS IN THOUSANDS
                                                                          ------------------------------------------------
<S>                                                                       <C>            <C>        <C>         <C>
                                                                              SHARE       CAPITAL    RETAINED
                                                                             CAPITAL      SURPLUS    EARNINGS     TOTAL
                                                                             ------      ---------  ----------  ----------
Balance at January 1, 1995..............................................            *       31,084      29,209      60,293
Changes during 1995--loss...............................................                              **(3,932)   **(3,932)
                                                                                    -
                                                                                         ---------  ----------  ----------
Balance at December 31, 1995............................................            *       31,084      25,277      56,361
Changes during 1996--net income.........................................                                11,676      11,676
                                                                                    -
                                                                                         ---------  ----------  ----------
Balance at December 31, 1996............................................            *       31,084      36,953      68,037
Changes during 1997:
  Net income............................................................                               113,143     113,143
  Dividend..............................................................                               (90,000)    (90,000)
                                                                                    -
                                                                                         ---------  ----------  ----------
Balance at December 31, 1997............................................            *       31,084      60,096      91,180
                                                                                    -
                                                                                    -
                                                                                         ---------  ----------  ----------
                                                                                         ---------  ----------  ----------
</TABLE>

------------------------

*   Represents an amount less than nominal NIS 1,000.

**  Restated, see note 1o.

NOTE 14--SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:

A.  GENERAL:

    1)  As stated in note 1b, the primary financial statements of the Company
       are drawn up in Israeli currency adjusted for the changes in the Israeli
       CPI.

       For incorporation in the financial statements of the Company's U.S.
       shareholder, Ampal-American Israel Corporation ("Ampal"), the Company
       also prepared these special condensed consolidated financial statements
       (hereafter--the special statements), see below.

    2)  Through December 31, 1992, Ampal translated the nominal Israeli currency
       data of the Company on the basis of which the primary financial
       statements were prepared into dollars for the purpose of inclusion in its
       financial statements. The translation was made in accordance with the
       principles of remeasurement set forth in Statement of Financial
       Accounting Standard ("SFAS") No. 52 of the Financial Accounting Standards
       Board of the United States ("FASB") for entities operating in a highly
       inflationary economy.

       The rate of inflation in Israel has decreased considerably in recent
       years. In view of the above, in 1993, Ampal decided that translation into
       dollars should be made in accordance with the principles applicable to
       economies no longer considered highly inflationary.

    3)  These special statements have been prepared for the purpose of
       translation into dollars and inclusion in the Ampal consolidated
       financial statements in accordance with instructions of Ampal, as
       follows:

       (a) The special statements are drawn up in Israeli currency (NIS) terms.


                                      171
<PAGE>

                              OPHIR HOLDINGS LTD.

                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 14--SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
       (b) For determining the applicable Israeli currency balances as of
           January 1, 1993, non-monetary assets and shareholders' equity items
           at December 31, 1992 were remeasured into dollars and translated into
           Israeli currency at the dollar exchange rate as of that date ($1 =
           NIS 2.764).

       (c) Transactions that took place after January 1, 1993 are reflected in
           the special statements in their original nominal NIS values.

       (d) The financial data of associated companies, the financial statements
           of which are drawn up in dollars, were translated into Israeli
           currency at the exchange rate at December 31 of each year.

       (e) Adjustments required to make the data to conform with U.S. generally
           accepted accounting principles ("GAAP") have been made.

    4)  For the convenience of Ampal, these special statements have been
       translated into dollars in accordance with the principles set forth in
       SFAS 52.


                                      172
<PAGE>

                              OPHIR HOLDINGS LTD.

                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 14--SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
    B.  FOLLOWING ARE THE SPECIAL STATEMENTS:

    1)  Consolidated balance sheets at December 31, 1997 and 1996

<TABLE>
<CAPTION>
                                                                                                  TRANSLATED INTO
                                                                                                   U.S. DOLLARS,
                                                                          NEW ISRAELI SHEKELS      SEE A(4) ABOVE
                                                                          --------------------  --------------------
                                                                              DECEMBER 31           DECEMBER 31
                                                                          --------------------  --------------------
                                                                            1997       1996       1997       1996
                                                                          ---------  ---------  ---------  ---------
<S>                                                                       <C>        <C>        <C>        <C>
                                                                              IN THOUSANDS          IN THOUSANDS
                                                                          --------------------  --------------------
ASSETS
Current assets:
  Cash and cash equivalents.............................................     39,156      1,970     11,074        606
  Short-term loans receivable from associated companies.................     12,216      8,988      3,455      2,765
  Short-term investments................................................     27,419      5,222      7,754      1,606
  Accounts receivable...................................................      3,626      3,179      1,026        978
  Building under construction, net of advances from purchaser...........     57,225     10,465     16,183      3,219
  Capital notes from shareholder........................................                 8,000                 2,461
  Deferred income taxes.................................................                 3,716                 1,143
                                                                          ---------  ---------  ---------  ---------
                                                                            139,642     41,540     39,492     12,778
                                                                          ---------  ---------  ---------  ---------
Land--business inventory................................................     12,514                 3,539
                                                                          ---------             ---------
Investments:
  Associated companies..................................................    139,987    171,594     39,589     52,782
  Other companies.......................................................      4,379      8,213      1,238      2,526
  Bank deposit..........................................................     10,353                 2,928
                                                                          ---------  ---------  ---------  ---------
                                                                            154,719    179,807     43,755     55,308
                                                                          ---------  ---------  ---------  ---------
Fixed assets, net of accumulated depreciation...........................      6,757     82,259      1,911     25,303
                                                                          ---------  ---------  ---------  ---------
                                                                            313,632    303,606     88,697     93,389
                                                                          ---------  ---------  ---------  ---------
                                                                          ---------  ---------  ---------  ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Bank credit...........................................................     21,879     42,166      6,188     12,970
  Short-term loans from shareholders....................................                34,894                10,733
  Accounts payable and accruals.........................................      7,207     11,644      2,038      3,580
  Dividend payable......................................................     25,000                 7,070
  Deferred income taxes.................................................     10,490                 2,967
                                                                          ---------  ---------  ---------  ---------
                                                                             64,576     88,704     18,263     27,283
                                                                          ---------  ---------  ---------  ---------
Long-term liabilities:
  Payables in respect of acquisition of land--business inventory........     12,026     11,004      3,401      3,385
  Bank loans (net of current maturities)................................    114,520    124,265     32,387     38,223
  Deferred income taxes.................................................      8,638      7,947      2,443      2,447
                                                                          ---------  ---------  ---------  ---------
                                                                            135,184    143,216     38,231     44,055
                                                                          ---------  ---------  ---------  ---------
    Total liabilities...................................................    199,760    231,920     56,494     71,338
Shareholders' equity....................................................    113,872     71,686     32,203     22,051
                                                                          ---------  ---------  ---------  ---------
                                                                            313,632    303,606     88,697     93,389
                                                                          ---------  ---------  ---------  ---------
                                                                          ---------  ---------  ---------  ---------
</TABLE>


                                      173
<PAGE>

                              OPHIR HOLDINGS LTD.

                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 14--SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
    2)  Consolidated income statements for the years ended 1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                                                                                  TRANSLATION INTO U.S. DOLLARS
                                                                      NEW ISRAELI SHEKELS                SEE A(4) ABOVE
                                                                -------------------------------  -------------------------------
                                                                  1997       1996       1995       1997       1996       1995
                                                                ---------  ---------  ---------  ---------  ---------  ---------
<S>                                                             <C>        <C>        <C>        <C>        <C>        <C>
                                                                   ADJUSTED NIS IN THOUSANDS              IN THOUSANDS
                                                                -------------------------------  -------------------------------
Revenues and gains:
  From lease of buildings.....................................      5,505      5,072      4,453      1,596      1,591      1,438
  Share in profits of associated companies--net...............      7,323      9,773     *2,774      2,123      2,264       *169
  Gain from sale of building..................................     23,196                            6,725
  Gain on dilution of holding in an associated companies
    resulting from sale and issuance of shares to a third
    party--net................................................    118,402     30,395      1,160     32,954      9,536        385
  Gain from sale and increase in value of marketable
    securities--net...........................................     31,729                 8,078      9,196                 2,682
  Dividend received from another company......................        351        104        241        102         33         80
  Management fees from associated companies...................      1,250      1,074        100        363        337         33
                                                                ---------  ---------  ---------  ---------  ---------  ---------
                                                                  187,756     46,418     16,806     53,059     13,761      4,787
                                                                ---------  ---------  ---------  ---------  ---------  ---------
Expenses and losses:
  Depreciation of buildings...................................                               15                                5
  Write-down of investment in other companies.................      5,547      2,500      1,000      1,608        784        331
  Loss from decrease in value of quoted shares................                 1,748                              549
  General and administrative expenses.........................      4,699      2,100      1,477      1,362        659        490
  Financial expenses--net.....................................     11,562     22,762     16,008      3,352      7,141      5,327
                                                                ---------  ---------  ---------  ---------  ---------  ---------
                                                                   21,808     29,110     18,500      6,322      9,133      6,153
                                                                ---------  ---------  ---------  ---------  ---------  ---------
Income (loss) before taxes on income..........................    165,948     17,308     (1,694)    46,737      4,628     (1,366)
Taxes on income...............................................    (33,762)   (11,637)    (3,000)    (9,788)    (3,651)      (953)
                                                                ---------  ---------  ---------  ---------  ---------  ---------
Net income (loss) for the year................................    132,186      5,671     (4,694)    36,949        977     (2,319)
                                                                ---------  ---------  ---------  ---------  ---------  ---------
                                                                ---------  ---------  ---------  ---------  ---------  ---------
</TABLE>

------------------------

*   Restated, see note 1o.


                                      174
<PAGE>

                              OPHIR HOLDINGS LTD.

                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 14--SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
    3)  Statements of changes in shareholders' equity for the years ended
       December 31, 1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                                                                       NEW ISRAELI SHEKELS
                                                                          ----------------------------------------------
                                                                             SHARE        SHARE     RETAINED
                                                                            CAPITAL      PREMIUM    EARNINGS     TOTAL
                                                                          -----------  -----------  ---------  ---------
<S>                                                                       <C>          <C>          <C>        <C>
                                                                                           IN THOUSANDS
                                                                                           ------------
Balance at January 1, 1995..............................................         434       31,220      39,055     70,709
Changes during 1995--loss...............................................                              *(4,694)   *(4,694)
                                                                                 ---   -----------  ---------  ---------
Balance at December 31, 1995............................................         434       31,220      34,361     66,015
Changes during 1996--net income.........................................                                5,671      5,671
                                                                                 ---   -----------  ---------  ---------
Balance at December 31, 1996............................................         434       31,220      40,032     71,686
Changes during 1997:
  Net income............................................................                              132,186    132,186
  Dividend..............................................................                              (90,000)   (90,000)
                                                                                 ---   -----------  ---------  ---------
Balance at December 31, 1997............................................         434       31,220      82,218    113,872
                                                                                 ---   -----------  ---------  ---------
                                                                                 ---   -----------  ---------  ---------
</TABLE>

------------------------

*   Restated, see note 1o.

<TABLE>
<CAPTION>
                                                                     TRANSLATED INTO U.S. DOLLARS, SEE A(4) ABOVE
                                                              -----------------------------------------------------------
                                                                 SHARE        SHARE     RETAINED   TRANSLATION
                                                                CAPITAL      PREMIUM    EARNINGS   DIFFERENCES    TOTAL
                                                              -----------  -----------  ---------  -----------  ---------
<S>                                                           <C>          <C>          <C>        <C>          <C>
                                                                                     IN THOUSANDS
                                                                                     ------------
Balance at January 1, 1995..................................         157       10,477      13,351        (556)     23,429
Changes during 1995:
  Loss......................................................                              *(2,319)                *(2,319)
  Translation differences...................................                                              (53)        (53)
                                                                     ---   -----------  ---------  -----------  ---------
Balance at December 31, 1995................................         157       10,477      11,032        (609)     21,057
Changes during 1996:
  Net income................................................                                  977                     977
  Translation differences...................................                                               17          17
                                                                     ---   -----------  ---------  -----------  ---------
Balance at December 31, 1996................................         157       10,477      12,009        (592)     22,051
Changes during 1997:
  Net income................................................                               36,949                  36,949
  Dividend..................................................                              (25,028)                (25,028)
  Translation differences...................................                                           (1,769)     (1,769)
                                                                     ---   -----------  ---------  -----------  ---------
Balance at December 31, 1997................................         157       10,477      23,930      (2,361)     32,203
                                                                     ---   -----------  ---------  -----------  ---------
                                                                     ---   -----------  ---------  -----------  ---------
</TABLE>

------------------------

*   Restated, see note 1o.


                                      175
<PAGE>

                              OPHIR HOLDINGS LTD.

                            (AN ISRAELI CORPORATION)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 14--SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
    4)  Reconciliation of nominal/historical net income and shareholders' equity
       under Israeli generally accepted accounting principles (GAAP) to U.S.
       GAAP:

<TABLE>
<CAPTION>
                                                                                               NEW ISRAELI SHEKELS
                                                                                         -------------------------------
                                                                                           1997       1996       1995
                                                                                         ---------  ---------  ---------
<S>        <C>                                                                           <C>        <C>        <C>
                                                                                                  IN THOUSANDS
                                                                                                  ------------
(a)        Net income (loss) for the year:
             Net income (loss)--historical/nominal amount (see note 13)................    113,143     11,676    *(3,932)
                                                                                         ---------  ---------  ---------
             Reconciliation to U.S. GAAP:
               Effect of application of principles applicable to economies no longer
                 considered highly inflationary:
                 Depreciation..........................................................       (456)      (405)      (384)
                 Share in profits of associated companies..............................      5,573      1,193       (378)
                 Deferred income taxes.................................................     (3,939)    (6,793)

           Other:
               Gain from increase in value of shares which are presented as trading
                 securities while in the Israeli GAAP financial statements the
                 investment in those shares are accounted for by the equity method.....     11,109
               Gain from sale of building--net.........................................      6,756
                                                                                         ---------  ---------  ---------
                                                                                            19,043     (6,005)      (762)
                                                                                         ---------  ---------  ---------
           Net income (loss) for the year, as per (2) above............................    132,186      5,671    *(4,694)
                                                                                         ---------  ---------  ---------
                                                                                         ---------  ---------  ---------
(b)        Shareholders' equity at December 31, 1997, 1996 and 1995:
             Shareholders' equity--historical/ nominal amount (see note 13)............     91,180     68,037    *56,361
             Reconciliation to U.S. GAAP:
               Effect, at beginning of year, of application of principles applicable to
                 economies no longer considered highly inflationary....................      3,649      9,654     10,416
               Effect of reconciliation of net income for the year to U.S. GAAP (see(a)
                 above)................................................................     19,043     (6,005)      (762)
                                                                                         ---------  ---------  ---------
           Shareholders' equity, as per (3) above......................................    113,872     71,686     66,015
                                                                                         ---------  ---------  ---------
                                                                                         ---------  ---------  ---------
</TABLE>

------------------------

*   Restated, see note 1o.


                                      176
<PAGE>

         [Letterhead of Deloitte Touche Tohmatsu-Igal Brightman & Co.]

                      AUDITORS' REPORT TO THE SHAREHOLDERS
                      ------------------------------------
                                 OF AM-HAL LTD.
                                 --------------

We have audited the accompanying balance sheets of Am-Hal Ltd. ("the Company")
as of December 31, 1997 and 1996 and the consolidated balance sheet as of
December 31, 1997, and the related statements of operations, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997, and on a consolidated basis for the year 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 did not audit the financial statements of a partnership, whose assets
constitute approximately 11% of consolidated total assets 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 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 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.

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 as of December 31, 1997 and 1996 and on a consolidated
basis as of December 31, 1997 and the results of its operations, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997, and on a consolidated basis for the year ended
December 31, 1997, in accordance with generally accepted accounting principles.

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/ Igal Brightman & Co.
Igal Brightman & Co.
Certified Public Accountants


                                      177
<PAGE>

                        [LETTERHEAD of Shlomo Ziv & Co.]

                    AUIDITORS' REPORT TO THE SHAREHOLDERS OF
                          AMPAL ENGINEERING (1994) LTD.
                    ---------------------------------------

We have audited the balance sheets 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 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.


                                      178
<PAGE>

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 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.

                                                  /s/ SHLOMO ZIV & Co.
Tel-Aviv, March 18, 1997                              SHLOMO ZIV & Co.
                                             Certified Public Accountants (Isr.)


                                      179
<PAGE>

                   [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 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, 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.)


                                      180
<PAGE>

                       [Letterhead of Fahn, Kanne & Co.]

                                                       Number: 52
                                                       Tel-Aviv, March 10, 1997

                     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 l3 to the financial statements.

In our opinion, the abovementioned 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.)


                                      181
<PAGE>

                        [LETTERHEAD of Shlomo Ziv & Co.]

                    AUIDITORS' REPORT TO THE SHAREHOLDERS OF

                           AMPAL HOLDINGS (1991) LTD.
                    ----------------------------------------

We have audited the balance sheets 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 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 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.


                                      182
<PAGE>

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 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.

Tel-Aviv, March 6, 1997                               SHLOMO ZIV & Co.
                                                  /s/ SHLOMO ZIV & Co.
                                            Certified Public Accountants (Isr.)


                                      183
<PAGE>

[LETTERHEAD 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, 1997 and 1996 and the related statements of income, shareholders'
equity and cash flows for the three years in the period ended December 31, 1997,
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 18 to the financial statements.

In our opinion, based on our audit and the reports of other auditors, the
abovementioned financial statements present fairly the financial position of the
Company as of December 31, 1997 and 1996 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 1997, in conformity with accounting
principles generally accepted in Israel, consistently applied. Also, in our
opinion, the financial statements based on nominal data (Note 18) present
fairly, in conformity with generally accepted accounting principles, the
financial position of the Company as of December 31, 1997 and 1996, 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, 1997, 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 Suites. The data
regarding this difference is summarized in Note 19 to the financial statements.



                                       /s/ Fahn, Kanne & Co.

                                       Fahn, Kanne & Co.

                                       Certified Public Accountants (Isr.)


                                      184
<PAGE>

          [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.


                                      185
<PAGE>

In our opinion, based on our audits and the reports ofthe other auditors, the
financial statments 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 December31, 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 abovementioned
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


                                      186
<PAGE>

                              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 December31, 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.


                                      187
<PAGE>

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 abovementioned
differences are summarized in Note 8E to the financial statements.

Pursuant to Section 211 of the Companies Ordinance (New Version) - l983, 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


                                      188
<PAGE>

                    [LETTERHEAD OF DELOITTE TOUCHE TOHMATSU
                      Brightman Bar-levav Friedman & Co.]

                   AUDITORS' REPORT TO THE SHAREHOLDERS OF
                         BAY HEART LTD. AND SUBSIDIARY

We have audited the accompanying balance sheet of Bay Heart Ltd. ("the Company")
as of December 31, 1997, and the consolidated balance sheet as of such date, and
the related statements of operations, changes in shareholders' equity and cash
flows - of the Company and on a consolidated basis - for the year then ended.
These financial statements are the responsibility of the Company's Board of
Directors and management. Our responsibility is to express an opinion on these
financial statements based on our audit. Comparative figures in the financial
statements as of December 31, 1996, and for the years ended December 31, 1996
and 1995, 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 audit provides 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, 1997, and the results of operations, changes in shareholders'
equity and cash flows - of the Company and on a consolidated basis - for the
year 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/ Igal Brightman & Co.

Igal Brightman & Co.
Certified Public Accountants

Haifa, February 15, 1998


                                      189
<PAGE>

                      [Letterhead of Ronel Stettner & Co.]


                    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 has 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.


                                      190
<PAGE>

                      [Letterhead of Ronel Stettner & Co.]


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,                         /s/ RONEL STETTNER & CO.
February 10, 1997                          Certified Public Accountants (Israel)


                                      191
<PAGE>

                       [LETTERHEAD OF KOST LEVARY & FORER
                    A MEMBER OF ERNST & YOUNG INTERNATIONAL]

                         REPORT OF INDEPENDENT AUDITORS
                             To the Shareholders of
                          CARMEL CONTAINER SYSTEMS LTD.

      We have audited the accompanying consolidated balance sheets of Carmel
Container Systems Ltd. and its subsidiaries as of December 31, 1996 and 1997,
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, 1997. 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
subsidiaries, which statements reflect total assets constituting 21% and 21% as
of December 31, 1996 and 1997, respectively, and total revenues constituting
30%, 32% and 34% of the related consolidated totals for each of the three years
in the period ended December 31, 1997. 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. 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
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 historical cost adjusted to reflect the changes in the general
purchasing power of the Israeli currency, as required by 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, 1996 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997, 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, LEVARY and FORER

Tel-Aviv, Israel                                 KOST, LEVARY and FORER
March 9, 1998                              Certified Public Accountants (Israel)
                                         A Member of Ernst & Young International


                                      192
<PAGE>

                    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.


March 26, 1997                            /s/ Arthur Andersen LLP
New York, New York


                                      193
<PAGE>

                           [LETTERHEAD OF PORAT & CO.]

                    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:

o     Balance sheets of the Company as of December 31, 1997, December 31, 1996.

o     Statements of Income, shareholders equity and cash flow for the company
      for the two years ended December 31, 1997 and December 31, 1996.

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 18 to the financial statements. These amounts have
been translated into U.S. dollars using the method described in Note 2G.


                                      194
<PAGE>

                           [LETTERHEAD OF PORAT & CO.]

                    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, 1997 and
1996, the results of its operations, the changes in shareholders' equity and
cash flows for each of the years in the period ended December 31, 1997, in
conformity with accounting principles generally accepted in Israel, consistently
applied. Also, in our opinion, the financial statements based on nominal data
(Note 18) present fairly, in conformity with generally accepted accounting
principles, the financial position of the Company as at December 31, 1997 and
1996, 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,
1997, 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 priciples generally accepted in Israel differ in certain respects
from 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 19 to the financial
statements.

                                           Porat & Co.


                                            /s/ Porat
                              Certified Public Accountants (Isr.)

Ramat Gan, February 16, 1998


                                      195
<PAGE>

               [LETTERHEAD OF FRIEDMAN, SHAPIRA, GOLDSTEIN, & CO.]

                    Report of Independent Public Accountants
                    ----------------------------------------

To the Shareholders of EPSILON INVESTMENT HOUSE LTD.

We have audited the Consolidated Balance Sheets of EPSILON INVESTMENT HOUSE
LTD., (an Israeli corporation) (hereinafter - "the Company") and its subsidiary
as of December 31, 1997 and 1996, and the related Consolidated Statements of
Income and the Changes in Shareholders' Equity for each of the 3 years in the
period ended December 31, 1997, 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 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 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 Statement of Cash Flows for the period has not been included in the
Financial Statements.

In our opinion, the above mentioned excepted, the nominal Financial Statements
in N.I.S., 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 of December 31, 1997 and 1996 and
the results of their operations and the changes in their shareholders' equity,
for each of the 3 years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.

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/ FRIEDMAN, SHAPIRA, GOLDSTEIN, & CO.
                                FRIEDMAN, SHAPIRA, GOLDSTEIN, & CO.
                                         Certified Public Accountants


Tel-Aviv, 9 March, 1998


                                      196
<PAGE>

                          [LETTERHEAD OF PORAT & Co.]

                    Report of Independent Public Accountants
                    ----------------------------------------
                                       of
                                       --
              Hod Hasharon Sport Center (1992) Limited Partnership
              ----------------------------------------------------

We have audited the balance sheet of Hod Hasharon Sport Center (1992) Limited
Partnership as at December 31, 1997 and 1996, the related statements of income,
partners' capital and cash flows for each of the two years in the period then
ended, 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.


                                      197
<PAGE>

                          [LETTERHEAD OF PORAT & Co.]

                    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, 1997
and 1996, the results of its operations, the changes in partners' capital and
cash flows for each of the two years in the period ended December 31, 1997, in
conformity with accounting principles generally accepted in Israel, consistently
applied. Also, in our opinion, the financial statements based on nominal data
(Note 18) present fairly, in conformity with generally accepted accounting
principles, the financial position of the partnership as at December 31, 1997
and 1996, 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,
1997, 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 4, 1998


                                      198
<PAGE>

[KOST LEVARY & FORER LETTERHEAD]


                         REPORT OF INDEPENDENT AUDITORS

                             To the Shareholders of

                               MIVNAT HOLDING LTD.

      We have audited the balance sheets of Mivnat Holding Ltd. ("the Company")
as of December 31, 1997 and 1996 and the consolidated balance sheets ("the
Consolidated") for the same dates and the related 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, 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 in Isrel, including those prescribed by the Israeli Auditors'
Regulations (Mode of Performance), 1973, which do not differ is any significant
respect from United States 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
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 audits 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
presentations. 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 Statements of the Institute of
Certified Public Accountants in Israel. A summary of the Company's financial
statements in nominal (historical) Israeli shekels which served as a basis for
the Company's adjusted financial statements, is presented in Note 30.

      The Company has restated its financial statements for the years ended
December 31, 1996 and 1995, in order to retroactively reflect the change in the
accounting treatment of the proportionate consolidation of an investee and
capitalization of financial expenses related to construction of resident units,
as indicated in Note 2p.


                                      199
<PAGE>

[KOST LEVARY & FORER LETTERHEAD]


      In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of - the Company and the
Consolidated - as of December 31, 1997 and 1996, and the related results of
income, changes in shareholders' equity and cash flows - the Company and the
Consolidated - for each of three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles in Israel. Also, in our
opinion, the Consolidated financial statements based on nominal data (Note 28)
present fairly, in all material respects, the Consolidated financial position as
of December 31, 1997 and 1996, and the related Consolidated results of income,
changes in shareholders' equity, and this consolidated cash flows for the each
of the three years in the period ended December 31, 1997, 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 28 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 our information and explanations which we received and as
reflected in the books of the Company.

                                     /s/ Kost, Levary and Forer

                                         Kost, Levary and Forer
Tel-Aviv, Israel                         Certified Public Accountants (Israel)
March 10, 1998                           A Member of Ernst & Young International


                                      200
<PAGE>

HAGGAI WALLENSTEIN DOV & Co. CPA (1sr.)


                                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, 1997 and 1996, 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 3l, 1997, 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, 1997 and 1996, 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, 1997, 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.)

Ramar-Gan,
 March 15, 1998


                                      201
<PAGE>

                         [LETTERHEAD HAFT & HAFT & Co.]

                        [LETTERHEAD NEXIA INTER-NATIONAL]

                                    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.


                                      202
<PAGE>

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


                                      203
<PAGE>

                       [LETTERHEAD OF 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, shareholders' 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 (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 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 Bravly

BRAUDE BAVLY CPA

24 February 1997


                                      204
<PAGE>

                       [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 statetment 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 Bravly

BRAUDE BAVLY

Tel Aviv, March 1, 1998


                                      205
<PAGE>

                        [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/ Marder Menackam

Tel-Aviv, February 24, 1998               Certified Public Accountant (Isr.)


                                      206
<PAGE>

                 [LETTERHEAD OF REUVENI, HARTUV, TEPPER & CO.]

                    AUDITOR'S REPORT TO THE SHAREHOLDERS OF
                    ---------------------------------------
                  PRI HA'EMEK (CANNED AND FROZEN FOOD) 88 LTD.
                  --------------------------------------------


We have audited the accompanying balance sheets of Pri Ha'emek (Canned and
Frozen Food) 88 Limited (hereinafter the Company) as at December 31, 1995 and
1994, the consolidated balance sheets as at December 31, 1995 and 1994, and the
statements of profit and loss, changes in shareholders' equity and cash flows of
the Company and consolidated for each of the three years in the period ended
December 31, 1995. 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 audit.

We conducted our audit in accordance with Generally Accepted Auditing Standards,
including those prescribed under the Auditors' Regulations (Auditor's Mode of
Performance), 1973. Those standards require us to plan and perform the audit
with the aim of obtaining a reasonable degree of assurance that the financial
statements are free of material misstatement, whether caused by an error in the
financial statements or caused by misleading information included therein. An
audit includes examining, on a test basis, evidence supporting the amounts and
information 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 fairness of the overall
presentation of the financial statements. We are satisfied that our audit
provides a fair basis for our opinion. 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.

The above mentioned financial statements have been prepared in New Israeli
Shekels and remeasured into U.S. Dollars in accordance with the principles of
remeasurement set forth in Statement No. 52 of the Financial Accounting
Standards Board of the U.S.A. (See Note 1).

In our opinion, based on our audit, the above mentioned financial statements
present fairly, in conformity with Generally Accepted Accounting Principles in
all material respects the financial position of the Company and consolidated as
at December 31, 1995 and 1994, and the results of the operations, the changes in
shareholders' equity and the cash flows of the Company and consolidated for each
of the three years in the period ended December 31, 1995.

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.


                                      207
<PAGE>

                    AUDITOR'S REPORT TO THE SHAREHOLDERS OF
                  PRI HA-EMEK (CANNED AND FROZED FOOD) 88 LTD.
                                  (CONTINUED)

Pursuant to Section 211 of the Companies Ordinance (New Edition) 1983, we state
that we have obtained all the information and explanations we have 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
books of the Company.

Without qualifying our above opinion, we draw attention to note 1(2) to the
financial statements, concerning the potential importance of matters reflected
in this note on the continuance of the Company's activities as a going concern
and its ability to pay its debts as they fall due.



                                        /s/ Reuveni, Hartuv, Tepper & Co.
                                        Certified Public Accountants (Isr).

Tel-Aviv, March 24, 1996.


                                      208
<PAGE>

                        [LETTERHEAD OF FAHN, KANNE & Co.]

                     AUDITORS' REPORT TO TIE 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, 1997. 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, 1997, 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 Accountant (Isr.

Tel Aviv, Israel, March 21, 1998


                                      209
<PAGE>

                        [LETTERHEAD of DOV KAHANA & CO.]

                      Auditors' Report to the Shareholders
                      ------------------------------------

                                       of
                                       --

                     Red Sea Marineland Holding (1973) Ltd.
                     --------------------------------------

We have examined the Balance Sheets of Red Sea Marineland Holding (1973) Ltd. as
at December 31, 1995 and 1994. Our examination was made in accordance with
generally accepted auditing standards, including those prescribed under the
Auditors Regulations (Auditor's Mode of Performance) 1973, and accordingly we
have applied such auditing procedures as we considered necessary in the
circumstances.

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 Sheets present fairly, in conformity with
generally accepted accounting principles, the financial position of the company
as at December 31, 1995 and 1994, 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 Sheets is given according to
the best of our information and the explanations received by us and as shown by
the books of the company.

Ramat-Gan, Israel, March 11, 1996

                                                    /s/ Dov Kahana & Co.
                                                      Dov Kahana & Co.
                                             Certified Public Accountants (Isr.)


                                      210
<PAGE>

                       [LETTERHEAD OF FAHN, KANNE & CO.]


                INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS
                     OF RED SEA UNDERWATER OBSERVATORY LTD.

We have audited the balance sheets of "Red Sea Underwater Observatory Ltd." (the
"Company") and the consolidated balance sheets of the Company and its
subsidiaries as of December 31, 1997 and 1996 and the related Company and
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the two years in the period ended December 31, 1997. These
financial statements are the responsibility of the board of directors and the
management of the Company. Our responsibility is to express an opinion on these
financial statements based on our audits.

The statements of income and changes in shareholders' equity for the two years
ended December 31, 1995 and the statement of cash flows for the year then ended
were audited by other auditors.

We did not audit the financial statements of the consolidated subsidiaries whose
assets constitute approximately 73% and 62% of total consolidated assets as of
December 31, 1997 and 1996 respectively and whose income constitutes
approximately 32% and 37% of the total consolidated income of the Company for
the years then ended, respectively. The financial statements of those
subsidiaries were audited by other auditors whose reports have been furnished to
us. Our opinion, as it relates to the amounts included in respect of these
subsidiaries, is based solely on the said reports of the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed by the Auditors' Regulations (Auditors
Mode of Performance), 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 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 the board of directors and by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

The abovementioned financial statements were prepared on the basis of historical
cost, adjusted to reflect changes in the general purchasing power of the Israeli
currency in accordance with opinions of the Institute of Certified Public
Accountants in Israel. Condensed financial statements in nominal shekels, which
served as the basis for the adjusted statements, are presented in Note 28. These
amounts were translated into U.S. dollars using the method described in Note 29.

In our opinion, based on our audits and on the reports of the other auditors,
the aforementioned financial statements present fairly, in all material
respects, the consolidated and Company financial position as of December 31,
1997 and 1996, and the Company and consolidated results of operations, changes
in shareholders' equity and cash flows for each of the two years in the period
ended December 31, 1997, in accordance with generally accepted accounting
principles in Israel, consistently applied. Also, in our opinion, the financial
statements based on nominal data (Note 28) present fairly, in conformity with
generally accepted accounting principles, the financial position of the Company
as of December 31, 1997 and 1996 and the results of its operations for the two
years in the period ended December 31, 1997, on the basis of the historical cost
convention. Furthermore, in our opinion, the abovementioned financial statements
were prepared in accordance with the Securities Regulations (Preparation of
Annual Financial Statements) - 1993.

In addition, in our opinion, the condensed financial statements translated into
U.S. dollars (Note 29) are presented fairly in conformity with S.F.A.S. 52.


                                                   Fahn, Kanne & Co.
Tel-Aviv, Israel                          Certified Public Accountants (Isr.)
March 21, 1998


                                      211
<PAGE>

                        [LETTERHEAD OF DOV KAHANA & CO.]

                                AUDITORS' REPORT
                                ----------------
                             TO THE SHAREHOLDERS OF
                             ----------------------
                      RED SEA UNDER WATER OBSERVATORY LTD.
                      ------------------------------------

We have audited the Balance Sheets of Red Sea Under Water Observatory Ltd.
(hereinafter "the Company") and the Consolidated Balance Sheet of the Company
and its subsidiaries as at December 31, 1995 and 1994, the related statements
of income and shareholders' equity and cash flows of the Company for each of the
three years, Consolidated for each of the two years, in the period ended
December 31, 1995, 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 about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentations. We believe that our audits provide a reasonable basis for our
opinion.

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

Condensed statements of the Company in historical values which formed the basis
of the adjusted statements appear in Note 14 to the financial statements. These
amounts have been translated into U.S. dollars using the method described in
Note 15.

The Financial Statements of subsidiaries operating abroad, whose assets
constitute app. 41% of the total assets contained In the Consolidated Balance
Sheet (31.12.94: app. 42%) and whose sales constitute app. 38% of the total
sales contained in the Consolidated Statement of Income for the year ended
December 31, 1995 (1994: app. 43%), have been audited by other auditors.

In our opinion, based on our audit and the reports of other auditors, as above
mentioned, the financial statements present fairly the financial position of the
Company and Consolidated as at December 31, 1995 and 1994, the results of
operations, the changes in shareholders' equity and cash flows of the Company
for each of the three years, Consolidated for each of the two years, in the
period ended December 31, 1995, in conformity with accounting principles
generally accepted in Israel, consistently applied. Also, in our opinion, the
condensed financial statements based on nominal data (Note 14) present fairly,
in conformity with generally accepted accounting principles in Israel and in the
US., the financial position of the Company as at December 31, 1995 and 1994, and
the results of its operations for each of the three years in the period ended
December 31, 1995, on the basis of the historical cost convention. As applicable
to these condensed financial statements, such accounting principles are
substantially identical in all material respects.

Also in our opinion the Condensed Translated Statements into U.S. Dollars (Note
15) are presented fairly in conformity with S.F.A.S. 52.

                                                      /s/ D. Kahana & Co.
Ramat Gan, Israel, March 21, 1996                       Dov Kahana & Co.
                                             Certified Public Accountants (Isr.)


                                      212
<PAGE>

[LETTERHEAD OF DELOITTE TOUCHE TOHMATSU]


                    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, 1997 and
the Consolidated Balance Sheet of the Company and its subsidiary as at December
31, 1996, and the related Consolidated Statements of Income and the Changes in
Shareholders' Equity for each of the 3 years in the period ended December 31,
1997, 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 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 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 Statement of Cash Flows for the period has not been included in the
Financial Statements.

In our opinion, the above mentioned excepted, the Nominal Financial Statements
in N.I.S., 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 Decanter 31, 1997 and the financial position of
the Company and its subsidiary, as at December 31, 1996 and the results of their
operations and the changes in their shareholders' equity, for each of the 3
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.

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/ Friedman, Shapira, Goldstein & Co.

FRIEDMAN, SHAPIRA, GOLDSTEIN & CO.
Certified Public Accountants


Tel-Aviv, 9 March, 1998


                                      213
<PAGE>

                       [LETTERHEAD OF KOST LEVARY & FORER]

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 1997 and 1996,
which were audited by us, and on which we expressed our opinion on February 18,
1998, have been provided to you.

     We have audited the accompanying translated U.S. dollar balance sheets of
the Company as of December 31, 1997 and 1996, and the related translated U.S.
dollar statements of income for each of the three years in the period ended
December 31, 1997. 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, 1997 and their accompanying Notes.


                                      214
<PAGE>

                      [LETTERHEAD OF KOST LEVARY & FORER]

     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, 1997 and 1996, and the
related translated U.S. dollar results of its operations for each of the three
years in the period ended December 31, 1997, 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, LEVARY and FORER
Tel-Aviv, Israel                                   KOST, LEVARY and FORER
February 18, 1998                          Certified Public Accountants (Israel)


                                      215
<PAGE>

                       [LETTERHEAD OF KOST LEVARY & FORER]

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 1997 and 1996,
which were audited by us, and on which we expressed our opinion on February 18,
1998, have been provided to you.

     We have audited the accompanying translated U.S. dollar balance sheets of
the Company as of December 31, 1997 and 1996, and the related translated U.S.
dollar statements of income for each of the three years in the period ended
December 31, 1997. 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, 1997 and their accompanying Notes.


                                      216
<PAGE>

                       [LETTERHEAD OF KOST LEVARY & FORER]

     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, 1997 and 1996, and the
related translated U.S. dollar results of its operations for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles in Israel. As applicable to the Company's
financial statements, accounting principles generally excepted in the United
Sates and in Israel are substantially identical in all material respects.

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

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

                                                        Sincerely
Tel-Aviv, Israel                               /s/ KOST, LEVARY and FORER
February 18, 1998                                    KOST, LEVARY and FORER
                                           Certified Public Accountants (Israel)


                                      217
<PAGE>

                    [LETTERHEAD OF ALMAGOR & Co. CPA (ISR)]

                    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


                                      218
<PAGE>

          [LETTERHEAD OF Deloitte Touche Tohmatsu-Igal Brightman & 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. as of December 31, 1997 and 1996, and the related statements of
operations, changes in shareholders' deficiency and cash flows for each of the
three years in the period ended December 31, 1997, expressed in Israeli
currency. 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 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 nominal Israeli currency data,
on the basis of which the adjusted financial statements of the Company were
prepared, is presented in Note 10.

In our opinion, the aforementioned financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1997
and 1996, and the results of its operations, changes in shareholders' deficiency
and cash flows for each of the three years in the period ended December 31,
1997, in conformity with accounting principles generally accepted in Israel.

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
required 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 11 to
the financial statements.

/s/ Igal Brightman & Co.
Igal Brightman & Co.
Certified Public Accountants

Tel Aviv, March 9, 1998


                                      219
<PAGE>

                    [LETTERHEAD OF Deloitte Touche Tohmatsu
                      Brightman Bar-Levav Friedman & 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, 1997 and 1996, and the related statements of
operations, changes in shareholders' deficiency and cash flows for each of the
three years in the period ended December 31, 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 Auditors' Regulations (Auditor's
Mode of Perfonnance) - 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.


                                      220
<PAGE>

                    [LETTERHEAD OF Deloitte Touche Tohmatsu
                      Brightman Bar-Levav Friedman & Co.]

The Company has not prepared consolidated financial statements. 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 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, 1997
and 1996, and the results of operations, changes in shareholders' deficiency and
cash flows for each of the three years in the period ended December 31, 1997, 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 $l0,740,000 and $12,858,000
as of December 31, 1997 and 1996, respectively (97% and 92% 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/ Igal Brightman & Co.

Igal Brightman & Co.
Certified Public Accountants

Tel Aviv, March 9, 1998.


                                      221
<PAGE>

                     [LETTERHEAD OF Kesselman & Kesselman]

                                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.


                                      222
<PAGE>

                       [LETTERHEAD OF Coopers & Lybrand]

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
    March 5,1997
                                                   /s/ Kesselman & Kesselman


                                      223
<PAGE>

                                   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
31st day of March, 1998.

                                      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 31, 1998.

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

Arie Abend                        Director
Michael Arnon                     Director
Benzion Benbassat                 Director
Yaacov Elinav                     Director
Kenneth L. Henderson              Director
Irwin Hochberg                    Director
Hillel Peled                      Director
Shimon Ravid                      Director
Evelyn Sommer                     Director
Michael W. Sonnenfeldt            Director
Daniel Steinmetz                  Chairman of the Board
                                   of Directors and Director
Raz Steinmetz                     Director


By: /s/ Lawrence Lefkowitz
    -------------------------------------
             Lawrence Lefkowitz,
       and as attorney-in-fact for the
              Foregoing Persons                                   March 31, 1998


    /s/ Yehoshua Gleitman
    -------------------------------------
           Yehoshua Gleitman, Chief
         Executive Officer (Principal
              Executive Officer)                                  March 31, 1998


    /s/ Alan L. Schaffer
    -------------------------------------
            Alan L. Schaffer, Vice
       President-Finance and Treasurer
        (Principal Financial Officer)                             March 31, 1998


    /s/ Alla Kanter
    -------------------------------------
              Alla Kanter, Vice
           President-Accounting and
       Controller (Principal Accounting
                   Officer)                                       March 31, 1998


                                      224
<PAGE>

================================================================================


                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                              ---------------------


                                    EXHIBITS

                                       TO

                                    FORM 10-K


                    FOR ANNUAL AND TRANSITION REPORT PURSUANT
          TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1996


                             ----------------------


                        AMPAL-AMERICAN ISRAEL CORPORATION
             (Exact name of Registrant as specified in its Charter)


================================================================================


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