<PAGE>

                       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 1-8707

                         PEC Israel Economic Corporation
             (Exact name of registrant as specified in its charter)

                Maine                              13-1143528
--------------------------------------------------------------------------------
      (State or other jurisdiction               (I.R.S. employer
  of incorporation or organization)            identification no.)

  511 Fifth Avenue, New York, New York                10017
--------------------------------------------------------------------------------
 (Address of principal executive offices)           (Zip code)

Registrant's telephone number, including area code     (212) 687-2400
                                                   -----------------------------

Securities registered pursuant to Section 12(b) of the Act:

                                             Name of each exchange
      Title of each class                     on which registered
      -------------------                     -------------------

Common Stock (par value $1.00 per share)     New York Stock Exchange
--------------------------------------------------------------------------------

Securities registered pursuant to Section 12(g) of the Act:

                                      None
--------------------------------------------------------------------------------
                                (Title of class)

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES |X|  NO |_|

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

                           Exhibit Index is on Page 259.

                                Page 1 of 285  pages.

<PAGE>

      The aggregate market value of the outstanding Common Stock of the
registrant held by non-affiliates on March 25, 1998 was approximately
$72,515,000. Such aggregate market value was computed on the basis of the
closing price of the Common Stock of the registrant on the New York Stock
Exchange on that date. See Part II, Item 5, "Market for the Registrant's Common
Stock and Related Stockholder Matters."

      As of March 25, 1998, 18,362,188 shares of Common Stock were outstanding.

                    DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement to be filed in
connection with its 1998 Annual Meeting of Shareholders are incorporated by
reference in Part III.


                                     Page 2
<PAGE>

                                     PART I

Item 1. BUSINESS

      PEC Israel Economic Corporation ("PEC" or the "Company") organizes,
acquires interests in, finances and participates in the management of companies,
predominantly companies which are located in the State of Israel or are
Israel-related. PEC is often involved in the early development of a company and
has participated in the organization, financing or increase in capital of over
150 Israeli enterprises since its incorporation in 1926. The Company
participates actively in management through representation on boards of
directors and is involved in a broad cross-section of Israeli companies engaged
in various fields of business, including telecommunications and technology,
manufacturing, real estate, retailing, shipping and consumer products.

      Among PEC's holdings are significant interests in one of Israel's two
cellular telephone providers (Cellcom Israel Ltd.), the cable television company
that serves the Tel-Aviv metropolitan area and two other areas in Israel (Tevel
Israel International Communications Ltd.), a company that is a world leader in
digital visual information communication for the graphic design, printing,
publishing and video markets (Scitex Corporation Ltd.), one of Israel's leading
diversified high technology holding companies (Elron Electronic Industries
Ltd.), Israel's largest paint manufacturer (Tambour Ltd.), Israel's largest
manufacturer of cans and metal packaging material (Caniel-Israel Can Company
Ltd.), one of Israel's most active real estate construction and development
companies (Property and Building Corporation Ltd.), one of Israel's largest
shipping companies (El-Yam Ships Ltd.) and Israel's largest supermarket chain in
terms of revenue (Super-Sol Ltd.). PEC is also involved in several venture
capital funds and early stage development companies.

      PEC acquires interests in companies it believes have attractive long-term
growth potential. PEC generally seeks to acquire and maintain a sufficient
equity interest in a company to permit PEC, in conjunction with other companies
controlled by IDB Holding Corporation Ltd. ("IDB Holding" and, together with the
companies controlled by it, the "IDB Group"), to have a significant influence in
the management and operation of that company. PEC emphasizes the potential for
long-term capital appreciation over the ability or intention of an enterprise to
provide a cash return in the near future. Among the other factors PEC considers
in determining whether to acquire an interest in a specific enterprise are
quality of management, global or domestic market share, export sales potential
and ability to take advantage of the growth of the domestic Israeli economy.


                                       I-1

<PAGE>

      IDB Holding, through its majority owned subsidiary, IDB Development
Corporation Ltd. ("IDB Development"), owns beneficially approximately 81.35%
of the outstanding Common Stock of PEC. IDB Holding is controlled by Mr. Raphael
Recanati, Chairman of the Board of PEC, and members of his family.

      IDB Holding is one of the largest business enterprises operating in the
private sector of the Israeli economy, with consolidated assets exceeding $2.7
billion at December 31, 1997. Discount Investment Corporation Ltd. ("Discount
Investment"), another indirect subsidiary of IDB Holding, owns shares of many
Israeli companies in which PEC has holdings and, through a subsidiary, has an
agreement with PEC that each will offer the other equal participation in
business opportunities that become available to either of them in Israel for a
fee of 2.5% of the equity or long-term debt invested by the paying party in
business opportunities initiated or initially presented by the other party. PEC
participates directly and through a contractual arrangement with Discount
Investment in the management of the companies in which PEC holds equity
interests. PEC and Discount Investment have agreed to cooperate on matters
concerning the advancement and development of companies in which each of them
owns voting interests, including the use of their voting power as shareholders
on a mutually agreed basis. PEC also has entered into voting agreements with
other members of the IDB Group with respect to voting of the stock of certain of
such companies.

      PEC believes that its agreements with Discount Investment and PEC's
relationship with the IDB Group afford PEC an important source of new business
opportunities in Israel, significant influence in the management and operations
of companies in which PEC holds shares and savings in PEC's cost of conducting
its business.

      PEC has received an Order from the United States Securities and Exchange
Commission determining that it is not an investment company within the meaning
of the Investment Company Act of 1940. In light of the Order, PEC has determined
that its business holdings should continue to be concentrated in Israel-related
companies that it, IDB Holding and other members of the IDB Group control or in
which they exercise a significant influence.


                                       I-2

<PAGE>

The Affiliates

         The following chart lists by industry group the companies in Israel or
related to Israel in which PEC holds voting equity interests (the "Affiliates"),
the principal business of each such company and, with respect to each such
company, the percentage of equity owned directly by each of PEC, Discount
Investment and the IDB Group in the aggregate. For additional information with
respect to the Affiliates, including information with respect to carrying
values, see Note 3 of the Notes to Consolidated Financial Statements of PEC and
Subsidiaries.

<TABLE>
<CAPTION>
                                                                                                Percentage
                                                                                          Equity Ownership as of
                                                                                             December 31, 1997
                                                                                          ----------------------
                                                                                                 Discount       IDB
                                      Principal Business                            PEC (20)    Investment   Group (1)
                                      ------------------                            --------    ----------   ---------

Telecommunications and Technology
<S>                                 <C>                                                <C>         <C>         <C>
Cellcom Israel Ltd.                 Cellular Telephone Provider                        12.5%       12.5%       25.0%

Tevel Israel International          Cable Television                                   23.7        24.8        48.5(2)
Communications Ltd.                 Broadcast Franchise

Scitex Corporation Ltd.             Digital Visual Information                          6.6         6.6        26.3(3)
                                    Communication

Elron Electronic                    Diversified High                                   13.6        26.4        40.0
Industries Ltd.                     Technology Holdings

Gilat Satellite Networks            Satellite Communications                            6.8         6.2        13.0(4)
Ltd.                                Systems

Gilat Communications                Satellite-Based                                     9.8         9.8        19.6
Ltd.                                Communications Services;
                                    Satellite-Based Interactive
                                    Distance Learning Systems

Tel-Ad Jerusalem Studios            Television Station Operator                        11.5        11.5        23.0
Ltd.                                and Producer of Television
                                    Programs

NICE Systems Ltd.                   Voice Logging and                                   2.1         2.1         4.2
                                    Communication Intelligence
                                    Systems

Liraz Systems Ltd.                  Customized Computer                                15.8        15.9        31.7(5)
                                    Software Systems: Distri-
                                    bution of Packaged Software;
                                    and Provider of Outsourcing
                                    Services

RDC-Rafael Development              Development Stage                                  16.7        16.7        50.1(6)
Corporation Ltd.                    High Technology
                                    Products
</TABLE>


                                       I-3

<PAGE>

<TABLE>
<CAPTION>
                                                                                                Percentage
                                                                                          Equity Ownership as of
                                                                                             December 31, 1997
                                                                                          ----------------------
                                                                                                 Discount       IDB
                                      Principal Business                            PEC (20)    Investment   Group (1)
                                      ------------------                            --------    ----------   ---------

Telecommunications and Technology (continued)
<S>                                 <C>                                                <C>         <C>         <C>
Gemini Israel Fund L.P.             Venture Capital Fund                               11.2%       11.2%       29.9%(7)
                                    (Primarily High Technology)

Gemini Israel II Limited            Venture Capital Fund                                3.8         3.8         7.6 (7)
Partnership                         (Primarily High Technology)

Advent Israel Limited               Venture Capital Fund                                5.4         5.4        10.8 (8)
Partnership                         (Primarily High Technology)

Electronics Line (E.L.)             Electronic Security                                13.9        13.9        27.8
Ltd.                                Systems

Libit Signal Processing Ltd.        Modem Technologies                                  5.3         5.4        10.7

Lipman Electronic                   Electronic and Computerized                         2.4         2.5         4.9
Engineering Ltd.                    Systems

Tradanet Electronic                 Electronic Commerce                                30.0        30.0        60.0
Commerce Services Ltd.              Services

Soreq Development Center            Support of Development-Stage                       25.0        25.1        50.1
(S.D.C.) Ltd.                       High Technology Companies

Soundesigns Multimedia              Integration of Computers and                       13.2        13.2        26.4 (9)
Communication Systems Ltd.          Conventional Communications

LOGAL Educational Software          Educational Software                                4.3         4.3        22.4 (10)
and Systems Ltd.

PAMOT Fund                          Acquisition of Development -                        3.3         3.3         6.6 (11)
                                    Stage Companies

Incubator for Technological         Support of Development -                           16.6        16.7        33.3
Entrepreneurship Kiryat             Stage High Technology
Weizmann Ltd.                       Companies
</TABLE>


                                       I-4

<PAGE>

<TABLE>
<CAPTION>
                                                                                                Percentage
                                                                                          Equity Ownership as of
                                                                                             December 31, 1997
                                                                                          ----------------------
                                                                                                 Discount       IDB
                                      Principal Business                            PEC (20)    Investment   Group (1)
                                      ------------------                            --------    ----------   ---------

Industry
<S>                                <C>                                                <C>         <C>         <C>
Tambour Ltd.                       Paint and Related Products                         42.8%       21.3%       64.3%(12)

Tefron Ltd.                        Lingerie and Undergarments                          7.1         7.2        14.3

Caniel-Israel Can Company Ltd.     Cans and Metal Containers                          29.2        14.7        43.9 (13)

Klil Industries Ltd.               Aluminum Extrusions and                            16.7        37.4        56.4 (14)
                                   Finished Products

Mul-T-Lock Ltd.                    Locks and Security Doors                           14.9        15.0        33.3 (15)

Ham-Let (Israel-Canada) Ltd.       Instrumentation                                     5.7         5.7        11.4
                                   Valves and Fittings

Maxima Air Separation Center Ltd.  Industrial Gas Production                          12.1        11.6        23.7

Lego Irrigation Ltd.               Irrigation Equipment                               13.2        13.2        26.4 (16)

Real Estate

Property and Building              Real Estate Construction                           38.8        14.9        53.7 (17)
Corporation Ltd.                   and Development

Retail, Shipping and Other

Super-Sol Ltd.                     Supermarkets                                       13.5        11.8        37.8 (18)

El-Yam Ships Ltd. (19)             Bulk Shipping                                      10.1        14.3        24.4

Renaissance Fund LDC               Acquisition of Equity Interests                     3.7        --           3.7
                                   for Capital Appreciation

General Engineers Limited          Distribution of Power                             100.0        --         100.0
                                   Generation Equipment

Isrotel Ltd.                       Ownership, Management and                           2.3         2.3         4.6
                                   Operation of Hotels

Mondex Israel Ltd.                 Electronic Smart Card                              25.0        25.0        50.0
</TABLE>


                                       I-5

<PAGE>

(1)   Total holdings of members of the IDB Group.

(2)   Interests in Tevel Israel International Communications Ltd. are held
      through a separate company, DIC and PEC Cable TV Ltd., whose shareholders
      are PEC (49%) and Discount Investment (51%).

(3)   The ownership interest of the IDB Group in Scitex Corporation Ltd.
      includes the 13.1% ownership interest of Clal Electronics Industries Ltd.
      and its subsidiary Clal Electronics Ventures Ltd., both affiliates of IDB
      Holding.

(4)   As a result of purchases of ordinary shares of Gilat Satellite Ltd. after
      December 31, 1997 by Clal Electronics Industries Ltd. and its subsidiary
      Clal Electronics Ventures Ltd., both affiliates of IDB Holding, as of
      March 25, 1998, the IDB Group owned 20.6% of the ordinary shares of Gilat
      Satellite Ltd.

(5)   In addition, PEC and Discount Investment own options to acquire ordinary
      shares of Liraz Systems Ltd. If all of the outstanding options of Liraz
      Systems Ltd. are exercised, PEC would own 17.9%, Discount Investment would
      own 18.0% and the IDB Group would own 35.9%, respectively, of the ordinary
      shares of Liraz Systems Ltd.

(6)   Interests in RDC-Rafael Development Corporation Ltd. are held through a
      separate company, DEP Technology Holdings Ltd. The ownership interest of
      the IDB Group includes the 16.7% ownership interest of Elron Electronic
      Industries Ltd. in RDC-Rafael Development Corporation Ltd.

(7)   PEC and Discount Investment each own 18.5% of Gemini Capital Fund
      Management Ltd. ("Gemini Capital"), the general partner of each of Gemini
      Israel Fund L.P. ("Gemini") and Gemini Israel II Limited Partnership
      ("Gemini II"), which has a nominal equity interest in Gemini and Gemini
      II. The ownership interest of the IDB Group includes the 3.7% and 3.8%
      ownership interests of Elron Electronic Industries Ltd. ("Elron") and
      Scitex Corporation Ltd. ("Scitex"), respectively, in Gemini. As a result
      of a purchase of ordinary shares of Gemini Capital after December 31,
      1997, as of March 25, 1998, PEC and Discount Investment each owned 25% of
      the ordinary shares of Gemini Capital. As a result of purchases of
      interests in Gemini after December 31, 1997, as of March 25, 1998, PEC
      owned 16%, Discount Investment owned 16%, Elron owned 5.3%, Scitex owned
      5.4% and the IDB Group owned 42.7%, respectively, of Gemini. The interests
      of PEC, Discount Investment and the IDB Group in Gemini and Gemini II
      represent nonvoting limited partnership interests.

(8)   Represents interests in Advent Israel Limited Partnership and a parallel
      limited partnership (together, "Advent Israel"), on a combined basis,
      other than in the assets and results of operations attributable to Advent
      Israel's interest in Gemini.

(9)   In addition, PEC and Discount Investment own options to acquire ordinary
      shares of Soundesigns Multimedia Communications Systems Ltd. If such
      options are exercised, PEC would own 17.2%, Discount Investment would own
      17.2% and the IDB Group would own 34.4%, respectively, of the ordinary
      shares of Soundesigns Multimedia Communications Systems Ltd.


                                      I-6
<PAGE>

(10)  The ownership interest of the IDB Group includes the 12.4% and 1.4%
      ownership interests of Gemini and Elron Electronic Industries Ltd.,
      respectively, in LOGAL Educational Software and Systems Ltd.

(11)  PAMOT Fund refers to five parallel limited partnerships and the
      percentages represent ownership interests in the five partnerships on a
      combined basis.

(12)  Includes the proportionate interest of the IDB Group in the 0.4% ownership
      interest in Tambour Ltd. ("Tambour") held by Tovalah Ltd., a wholly-owned
      subsidiary of Tambour. As a result of purchases of ordinary shares of
      Tambour after December 31, 1997 by PEC and Discount Investment, as of
      March 25, 1998, PEC owned 43.1%, Discount Investment owned 21.4% and the
      IDB Group owned 64.8%, respectively, of the ordinary shares of Tambour.

(13)  Includes the 27% equity interest in Caniel-Israel Can Company Ltd. of
      Ispah Holdings Ltd., a company in which PEC and Discount Investment each
      hold a 50% equity interest.

(14)  Includes the proportionate interest of the IDB Group in the 4.1% ownership
      interest in Klil Industries Ltd. ("Klil") held by Klil Aluminum Products
      Ltd., a wholly-owned subsidiary of Klil. As a result of purchases of
      ordinary shares of Klil after December 31, 1997 by PEC and Discount
      Investment, as of March 25, 1998, PEC owned 17.3%, Discount Investment
      owned 39.3% and the IDB Group owned 59%, respectively, of the ordinary
      shares of Klil.

(15)  Includes the proportionate interest of the IDB Group in the 10.3%
      ownership interest in Mul-T-Lock Ltd. held by Mul-T-Lock Technologies
      Ltd., a wholly-owned subsidiary of Mul-T-Lock Ltd.

(16)  After December 31, 1997, PEC and Discount Investment Corporation Ltd. sold
      their entire ownership interests in Lego Irrigation Ltd.

(17)  As a result of purchases of ordinary shares of Property and Building
      Corporation Ltd. after December 31, 1997 by PEC, as of March 25, 1998, PEC
      owned 41.2%, Discount Investment owned 14.9% and the IDB Group owned
      56.1%, respectively, of the ordinary shares of Property and Building
      Corporation Ltd.

(18)  The ownership interest of the IDB Group includes the 12.7% ownership
      interest of "Delek" - The Israel Fuel Corporation Ltd. in Super-Sol Ltd.
      As a result of purchases of ordinary shares of Super-Sol Ltd. after
      December 31, 1997 by PEC and Discount Investment, as of March 25, 1998,
      PEC owned 17.6%, Discount Investment owned 17.6% and the IDB Group owned
      47.9%, respectively, of the ordinary shares of Super-Sol Ltd.

(19)  Includes the Company's interest in Financial Holdings El-Yam (Hamigdal)
      Ltd.

(20)  The chart does not include one company with respect to which PEC holds
      less than a 2.5% equity interest which is not material to PEC.


                                      I-7

<PAGE>

Telecommunications and Technology

      Cellcom Israel Ltd. ("Cellcom"). Cellcom, a corporation owned by PEC,
Discount Investment, BellSouth Enterprises Inc. and companies controlled by
Joseph Safra and Moise Safra of Brazil, operates Israel's second cellular
telephone system. Cellcom began operations at the end of December 1994 and
serves all of Israel. By the middle of March 1998, over 850,000 subscribers were
utilizing Cellcom's cellular telephones, an increase of approximately 250,000
subscribers in the past year and over 600,000 customers in the past two years.
Approximately 27% of Israelis have mobile phones, a usage rate second only to
the Scandinavian countries. Cellcom has invested approximately $660 million in
the development and operation of its cellular telephone system.

      Cellcom's license to operate the second cellular telephone system expires
in 2004. Cellcom has the right to request, and Israel's Ministry of
Communications can agree, to extend the license for one or more periods of six
years. In February 1998, Israel's Ministry of Communications granted to Partner
Communications Ltd. ("Partner") a license for the establishment and operation of
a third cellular telephone system in Israel, which system is expected to begin
operations in September 1998. Elbit Ltd., a 40% owned subsidiary of PEC's
Affiliated Company Elron Electronic Industries Ltd., owns 17.5% of Partner.

      Cellcom uses TDMA (time division multiple access) digital technology, an
advanced technology for cellular communication. Cellcom's cellular telephone
system utilizes cell sites, switching machines and mobile telephone switching
offices to carry telephone calls. At the end of 1997, Cellcom had 600 operating
cell sites, six mobile telephone switching offices and 11 switching machines. In
order to improve the quality of its existing service, Cellcom intends to
construct an additional 150 cell sites, one mobile telephone switching office
and two switching machines in 1998.

      Cellcom's marketing strategy is based on the premise that cellular
telephones and service should be offered on a mass market basis. Cellcom's
rates, which are regulated by its license, are among the lowest in the world.
Cellcom charges users of its cellular service 12.9 cents per minute during peak
hours and 10 cents per minute during off peak hours. Cellcom may increase these
charges whenever the Israeli consumer price index increases by more than 8.5% in
any year. In addition, Cellcom charges an interconnect fee and, in 1998 and
1999, Cellcom may charge customers a monthly fee of $5.65, not including any
adjustments for inflation. Cellcom's peak charges are lower than the charges of
the operator of Israel's first cellular network during peak hours, which are 20
cents per minute.


                                      I-8
<PAGE>

      Cellcom markets cellular telephones and its cellular telephone system
through its own retail stores, a telemarketing group with service centers,
independent authorized distributors and independent importers of telephones. At
the end of 1997, Cellcom products and services were offered in over 65 cities
throughout Israel at 360 locations, of which 11 were Cellcom retail stores.

      Tevel Israel International Communications Ltd. ("Tevel"). PEC owns,
through its interest in DIC and PEC Cable TV Ltd., 23.7% of Tevel, which was
established in 1988 to develop, construct and operate cable television systems
in Israel. PEC's partners in Tevel are Discount Investment, Tele-Communications
Inc. ("TCI"), a leading owner and operator of cable television systems in the
United States, and United Pan European Co. ("UPC"), a major owner and operator
of cable television systems in Europe. TCI and UPC hold their interests in Tevel
through wholly owned subsidiaries.

      Tevel has exclusive franchises for the whole of the Tel Aviv-Givataim
metropolitan area, the southern region of Ashdod-Ashkelon and the
Nazareth-Jezreel Valley in the northern part of Israel. These franchises include
approximately 360,000 households - about 23% of the homes in Israel. Tevel has
completed the construction of approximately 97% of the cable network in its
franchise areas. At the end of 1997, Tevel had approximately 242,000
subscribers, constituting approximately 69% of the households in the area in
which network construction has been completed.

      The exclusive franchises granted to Tevel have a twelve year term expiring
in 2002 with a four-year renewal right. Tevel pays the Israeli government annual
franchise royalties of 5% of its gross revenues. The government regulates the
basic service subscription rates which cannot be increased beyond cost of living
index increases. Currently, government regulations prevent cable television
operators from offering advertising.

      Tevel offers customers a uniform, extended basic package of 41 channels
for a fixed monthly fee. The basic package includes local, national and regional
broadcasting channels, satellite delivered channels from Europe and Asia, and
five channels, subtitled in Hebrew - a movie channel, a sports channel, a family
entertainment channel, a science, nature and cultural channel and a children's
entertainment channel.

      Tevel has installed advanced scrambling and addressable two-way equipment
that protects the service from theft, and enables Tevel to offer additional
programming for which it may charge separately. Tevel offers its customers
recent theatrical movies on a pay per view basis over five channels programmed
and


                                      I-9
<PAGE>

packaged by Tevel under Tevel's brand name "Home Cinema". During 1997, monthly
sales of "Home Cinema" events increased steadily, reaching a sales rate of
93,000 events per month during the last quarter of 1997, and total sales in 1997
amounted to 1,040,000 events.

      Tevel holds a 50% ownership interest in Globcall Ltd., an operator of
telecommunication and switching systems for businesses. At the end of 1997,
Globcall served approximately 400 business locations with 35,000 telephone
extensions. In December 1997, Tevel acquired a 33% ownership interest in
NetVision Ltd., Israel's largest Internet services provider.

      In March 1998, Tevel agreed to purchase for $280 million Gvanim Cable
Television and a 32.3% ownership interest in Monitin Publishing. Gvanim holds
the franchise to operate cable television in Rishon Lezion, Ramle, Lod and the
Krayot near Haifa and has 140,000 subscribers. Monitin owns the financial daily
"Globes" and has ownership interests in other communication companies. The
acquisition is subject to the approvals of Israeli regulatory authorities.

      Scitex Corporation Ltd. ("Scitex"). Scitex is a world leader in visual
information communication. Scitex designs, develops, manufactures, markets and
supports products, systems and devices for three markets: digital preprint,
digital printing and digital video.

      Digital preprint covers input, output and proofing. The input line
consists of digital camera backs and color separation scanners. The output line,
which consists of hardware systems and software, includes digital front ends,
color inkjet printing and proofing systems, imagesetters and plate setters for
outputting color separation films or plates, client servers and archivers and
telecommunication workflow solutions.

      Scitex markets its preprint products to tradeshops, digital service
bureaus, commercial printers, and publishers. Customers include Fortune, The New
York Times, National Geographic, Sports Illustrated, R.R. Donnelley Corporation,
Le Figaro, The Daily Telegraph, Dai Nippon Printing and Ashai Shimbun.

      Digital printing includes the manufacture of computer-driven, inkjet
printers for very high speed, high volume printing and for variable-data
printing of personalized mass mailings, billings, bar codes, business forms and
lottery tickets. Scitex also offers servers and front ends for print-on-demand
systems, working with Xerox Corporation and others. Scitex sells its digital
printing products mainly to commercial printers, periodical printers and form
printers. Its customers include R.R. Donnelley Corporation, Unisys, Standard
Register,


                                      I-10
<PAGE>

Banta, Dai Nippon Printing and Toppan Group.

      Scitex, in a joint venture with KBA-Planeta AG, the world's third largest
press manufacturer, has developed and will begin marketing in 1998 a digital
offset press which is designed to print high quality, short runs at a
competitive cost and to digitize traditional print processes to increase
productivity and predictability, and thus reduce costs.

      In February 1998, Scitex announced an agreement to acquire Idanit
Technologies Ltd., a developer of wide format, inkjet digital printing systems,
for approximately $60 million in cash. Idanit's systems are used for short and
medium print runs of point of purchase displays, banners, truck and bus
advertising and outdoor advertising. Idanit's products are sold primarily to
silk screen printers and digital service bureaus worldwide.

      Digital video consists of the manufacture and marketing of digital video
non-linear, post-production, video editing systems and video manipulation
systems, such as digital video effects (DVE) generators and character
generators, which can be on-line or off-line, live or post production, as well
as other devices such as disks and switches. In 1997, Scitex Digital Video
received an Emmy Award from the National Academy of Television Arts and Sciences
for its development of real-time three dimensional manipulation for nonlinear
editing. The division markets its products to television broadcasters and
professional video stores. Its customers include ABC, CBS, NBC, British
Broadcasting Corporation, ESPN, and Home Box Office.

      The ordinary shares of Scitex are listed for quotation in the United
States on the National Association of Securities Dealers Automatic Quotation
System/National Market System ("NASDAQ/NMS") (symbol "SCIXF"). PEC, Discount
Investment, Clal Electronics Industries Limited ("Clal"), another member of
the IDB Group, and International Paper Company are parties to a shareholders'
agreement with respect to their ordinary shares of Scitex that, among other
things, (i) provides that Scitex shall have a board of directors consisting
of up to four nominees designated by each of PEC and Discount Investment as a
group, International Paper Company and Clal, and, if the three groups
determine that there should be another director, a nominee agreed upon by all
three groups, (ii) provides that the Chairman of the Board of Scitex and of
its executive committee be selected from the directors designated by PEC,
Discount Investment and Clal and (iii) restricts the acquisition and
disposition by such shareholders of ordinary shares of Scitex. The parties to
the shareholders agreement and Scitex have agreed that the Board of Directors
of Scitex will include two independent directors.

                                      I-11
<PAGE>

      Elron Electronic Industries Ltd. ("Elron"). Elron conducts its business
principally through high technology operating companies in which it holds
controlling or other significant equity interests. Elron's various affiliates
design, develop, manufacture, market and service products in the fields of
medical imaging, defense electronics, semiconductors, machine vision, software
and information technology. Elron has organized, invested in and developed
companies with new technologies believed to have global marketing potential that
could benefit from ties with Israel. Elron has developed and expanded by
identifying focused entrepreneurial teams and providing them with significant
strategic, financial and managerial assistance to refine and exploit their
technologies. In recent years, Elron has allocated substantial resources to
companies developing technologies and products for the Internet and intranets.

      Elron's affiliates include publicly-traded and privately-held companies.
As of March 25, 1998, its principal publicly-traded affiliates were Elbit
Medical Imaging Ltd. (40% owned-medical products and services in the fields of
diagnostic imaging and diagnostic ultrasound and establishment of diagnostic and
therapeutic imaging centers around the world, mainly in developing countries; in
February 1998, Elbit Medical signed an agreement to sell its diagnostic
ultrasound business to GE Medical Systems for $230 million - NASDAQ/NMS symbol
"EMITF" and also traded on the Tel Aviv Stock Exchange); Elscint Ltd., a 57%
owned subsidiary of Elbit Medical Imaging Ltd. (imaging technologies for medical
diagnostics, including computer tomography, magnetic resonance imaging, nuclear
medicine and mammography - New York Stock Exchange symbol "ELT"); Elbit Systems
Ltd. (35% owned - designs, develops and supplies integrated defense systems and
military electronic systems and products as well as upgrades and modernizes
military platforms in the fields of airborne, ground combat, naval and ground
command, control and communications systems - NASDAQ/NMS symbol "ESLTF" and also
traded on the Tel Aviv Stock Exchange); Elbit Ltd. (40% owned - communications
access systems for public and private networks; in February 1998 its affiliate,
Partner Communications Company Ltd. (17.5% owned), was awarded the license to
become the third cellular telephone operator in Israel - NASDAQ-NMS symbol
"ELBTF" and also traded on the Tel Aviv Stock Exchange); Elbit Vision Systems
Ltd. (54% owned by Elbit Ltd. - proprietary automated vision systems based on
computer vision and image interpretation technologies for the textile industry -
NASDAQ/NMS symbol "EVSNF"); Orbotech Ltd. (2.6% owned - application of machine
vision and related computer-based technologies to improve the production
processes of printed circuit boards and liquid crystal displays - NASDAQ/NMS
symbol "ORBKF"); Zoran Corporation (16% owned - integrated circuits and software
for digital video and audio compression applications - NASDAQ/NMS symbol
"ZRAN"); Mentortech Inc. (7% owned - technology-based training products -


                                      I-12
<PAGE>

over-the-counter stock symbol "MNTK"); NetManage Inc. (2% owned - provider of
standards-based software for the Internet and corporate intranets -
NASDAQ/NMS symbol "NETM"); and LOGAL Educational Software and Systems Ltd.
(1.5% owned (PEC and Discount Investment each also own a 4.36% equity
interest and Gemini Israel Fund L.P. owns a 12.7% equity interest) - designs,
creates, publishes and markets simulation-based, educational software
products - NASDAQ/NMS symbol "LOGLF").

      Among Elron's privately-held affiliates as of March 25, 1998 included
RDC-Rafael Development Corporation Ltd. (16.7% owned (PEC and Discount
Investment each also own a 16.7% equity interest) - commercialization of
technologies developed by RDC-Rafael Armament Development Authority, a division
of Israel's Ministry of Defense); Chip Express Corp. (40% owned - laser
technology which enables the production of engineering prototypes of Gate Arrays
(integrated circuit devices composed of an array of logic gates integrated to
form specific logic applications) to customers within 24 hours, the supply of
early production quantities in a week and competitively-priced volume production
parts); Eliashim Ltd. (15.8% owned - designs and develops information security,
anti-virus and anti-vandal software for personal computers, Local Area Networks
and the Internet); and Oren Semiconductor, Inc. (13% owned - design, manufacture
and marketing of integrated circuits based on a patented digital filter,
adaptive equalization and digital signal processing technologies for canceling
"ghost" images and for the consumer television market, which circuits are
designed to fit into conventional analogue television sets, VCRs, cable decoders
and television set top boxes). Elron also has a 5.3% limited partnership
interest in Gemini Israel Fund L.P., a venture capital fund in which PEC and
Discount Investment are limited partners.

      Elron also has ownership interests in the following six privately-held
companies which focus on advanced technologies, products and services within the
information technology field, including Internet/Intranet, networking and
application development for client/server and web environments: NetVision Ltd.
(32% owned - Israel's largest Internet services provider); MediaGate N.V. (40.3%
owned - provides single point access to the Internet with any real time
communication device); Ornetix Technologies Ltd. (44.8% owned - proprietary
network technology for CD-ROM drives, "CD jukebox" servers and management
software for computer networks); ArelNet Ltd. (16% owned - message switching
technologies and solutions including i-FAX, which enables faxes to be sent at
competitive prices over the Internet); Elementrix Technologies Ltd. (48.1% owned
-Intranet/Internet security company that develops advanced security products and
technologies); and ServiceSoft Corporation (26% owned - software


                                      I-13
<PAGE>

products that provide self-service support information directly to end users
over the Internet and Intranets).

      In October 1997, Elron's wholly-owned subsidiary, Elron Software Inc.,
purchased for $12 million all the assets of the Network Management and Network
Security Division of ON Technology Corporation headquartered in Cambridge,
Massachusetts, which develops software products for local area networks, wide
area networks, the Internet and corporate Intranets.

      Elron's three major affiliates, Elbit Medical Imaging Ltd., Elbit Systems
Ltd. and Elbit Ltd., constituted approximately 75% of Elron's total assets as of
December 31, 1997.

      Elron's ordinary shares are listed for quotation on the NASDAQ/NMS
(symbol "ELRNF") and on the Tel Aviv Stock Exchange ("TASE").

      Gilat Satellite Networks Ltd. ("Gilat Satellite"). Gilat Satellite
designs, develops, manufactures, markets and supports very small aperture
terminal ("VSAT") satellite earth stations and related equipment and software
for voice and data communications. Gilat Satellite's products are incorporated
into telecommunications networks which provide satellite-based communications
between a central location (a "hub") and a large number of
geographically-dispersed locations.

      Gilat Satellite markets principally three VSAT product lines:

      o     Satellite data delivery.

            FlexSat facilitates batch and interactive data communications for
credit and debit card authorization, inventory control, lottery systems, remote
training and automatic teller machine (ATM) services for customers such as
retail chains, gas stations and supermarkets. Gilat Satellite's OneWay VSAT
provides unidirectional data broadcast for the distribution of real-time
financial information, newswire broadcasts and paging signals for customers such
as stock exchanges, news agencies and paging operators.

      o     Satellite telephony.

            DialAway VSAT is a telephony product which provides single and dual
channel voice services such as satellite pay phones in remote areas. In 1997,
Gilat Satellite's subsidiary, Global Village Telecom Ltd., was awarded the right
to provide telecommunications services to over 1,500 villages in Chile using the
DialAway VSAT. The FaraWay VSAT provides multi-channel, on-demand voice,
telecopy and data services to remote and


                                      I-14
<PAGE>

undeveloped areas that lack adequate telecommunications infrastructure. The ISAT
is a frame-relay based product for comprehensive data, voice and video
applications for small corporate networks.

      o     Satellite-based Internet/Intranet.

            Skysurfer provides high speed Intranet access and high-quality
business television for an unlimited number of users using a plug-and-play
personal computer card.

            Gilat Satellite has established strategic relationships for product
development and marketing with GE Spacenet Corporation, COMSAT RSI Inc., AT&T
Tridom and GTECH Corporation in the United States and with ANT Bosch Telecom in
Germany and IBM Global Network in France. These service providers and equipment
suppliers offer certain of Gilat Satellite's products as integral parts of their
VSAT network offerings. Gilat Satellite, which is based in Israel, has offices
in the United States, France, China and Thailand.

      Gilat Satellite's stock is traded on the NASDAQ/NMS under the trading
symbol "GILTF".

      Gilat Communications Ltd. ("Gilat Communications"). Gilat Communications
provides satellite-based communications services in Israel, offering domestic
and international private data and voice communication networks by means of very
small aperture terminals (VSATS), satellite-based interactive distance learning
("IDL") systems and digital video broadcasting. Gilat Communications also
develops and provides satellite-based IDL systems worldwide, permitting
academic, training, governmental and commercial institutions to conduct and
create fully integrated academic courses or employee training to and from remote
sites.

      Gilat Communications' principal products are LearnNet and TrainNet, both
fully interactive distance learning and training systems. The two systems offer
proprietary hardware and software for creating, broadcasting and conducting
educational and training sessions. LearnNet is primarily designed for academic
instruction while TrainNet is targeted at corporate training.

      Through its wholly-owned subsidiary Israsat, Gilat Communications provides
international point-to-point private satellite communications and has an
estimated market share in Israel of almost 80%.

      Gilat Communications owns 25% of Spacecom Satellite Communications
Services Ltd., which holds exclusive marketing rights for the "AMOS 1" satellite
for the Middle East and Central


                                      I-15
<PAGE>

Europe.

      In December 1997, Gilat Communications had an initial public offering of
its ordinary shares in the United States and its ordinary shares are traded on
the NASDAQ/NMS under the trading symbol "GICOF".

      Tel-Ad Jerusalem Studios Ltd. ("Tel-Ad"). Tel-Ad is a major broadcaster
and producer of television programs in Israel, producing prerecorded and live
studio productions as well as productions on location.

      In July 1993, Tel-Ad was selected as one of three companies to operate
Israel's second television station (the "Second Channel"), the only privately
operated commercial television station. The broadcast license expires on October
31, 1999 and Tel-Ad may request that the license be extended for one four year
term. Broadcasts on the second television station began in November 1993. Each
of the three licensees is responsible for the entire programming for two days
every week, which two days may be Sunday and Wednesday, Monday and Thursday, or
Tuesday and Friday, and for every Saturday in one year of each three year
period. The two day pairings are rotated among the three licensees every two
years. From September 1996 through August 1997, Tel-Ad's programs were broadcast
on Tuesdays and Fridays. Since September 1997, Tel-Ad's programs have been
broadcast on Sunday and Wednesday, which will continue through August 1998.

      The Second Channel is the most-watched television station in Israel. The
popularity of the channel has provided the impetus for advertisers and
advertising agencies alike to take advantage of the opportunities that the
medium offers. In 1997, 30% of all Israeli advertising budgets were allocated
for television. Substantially all of Tel-Ad's revenues are derived from the sale
of advertising air time. Tel-Ad's broadcast license permits Tel-Ad to allocate
up to 10% of its daily 18-hour broadcast time to commercials.

      Tel-Ad broadcasts a varied program schedule, with approximately half of
the programs produced in Israel and half of the programs acquired from outside
of Israel, including top-rated feature films and popular television series. The
programs span a wide range of genres and formats, including entertainment,
drama, humor and satire, sporting events, game shows, talk shows and current
affairs. Tel-Ad programs that achieved particular success with the viewing
audience included the investigative reporting magazine "Fact", the humor and
satire program "Harzufim", the entertainment/variety show "Laila Gov", the
dramatic series "Ramat Aviv Gimmel" and "Florentene" and television travel
magazine "World Travel".


                                      I-16
<PAGE>

      Tel-Ad's offices in the Jerusalem Theatre Building include
state-of-the-art technical facilities, including the first fully digital
television studio in Israel, two multi-purpose television studios, and fully
equipped computerized editing and animation suites. Tel-Ad's offices in Tel Aviv
house its sales and marketing divisions.

      NICE Systems Ltd. ("NICE"). NICE develops, designs, manufactures, markets
and services computer telephony integration (CTI) products that provide logging,
quality measurement and management solutions for voice, fax and data. NICE
provides reliable and secure systems for managing communication transactions in
organizations. NICE's products are based on an open architecture and incorporate
enhanced digital networking and voice, fax and data processing technologies. The
principal product of NICE is NiceLog, a technologically leading CTI digital
voice recording and retrieval system, known as a voice logging system, that
performs continuous, reliable recordings of up to thousands of channels. NiceLog
offers advanced voice processing features and provides a variety of connectivity
options to computer networks. The NiceCLS (Call Logging System), a CTI add-on
module, enables prompt location and retrieval of data according to comprehensive
call details such as the time of the call, duration, extension number and
calling number.

      NICE also offers NiceCall and NiceFax. NiceCall is a compact voice logging
system that uses between eight and 24 channels for smaller applications such as
public safety services and bank branches. NiceFax is an advanced enterprise-wide
fax management and archiving system for managing all incoming and outgoing fax
traffic in a computerized database.

      In 1997, NICE purchased Dees Communications, a Canadian corporation that
provides call center monitoring software solutions for quality measurement,
training and agent productivity enhancement. In March 1998, NICE signed a
definitive agreement to acquire the major assets of IBS Corporation, a
California based corporation that develops and distributes software products
incorporating proprietary technologies for screen and voice management and
screen capturing for IBM Mainframe, AS400 and various client/server
environments.

      NICE markets, distributes and services its voice logging products
worldwide through independent distributors that predominantly specialize in the
voice logging market and through its own sales and technical support force in
the United States, Canada, Germany and Israel. In 1997, NICE entered worldwide
distribution agreements with Lucent Technologies and Siemens; these agreements
are in addition to similar arrangements with IPC Information Systems and ETRALI.
NICE's voice logging systems are used by a broad range of users such as
financial institutions,


                                      I-17
<PAGE>

air traffic control centers, public safety agencies and intelligence agencies.
Users of NiceLog systems include ABN AMRO Bank, Bank of Montreal, Chase
Manhattan, Citibank, Deutsche Bank, First Chicago, the Sydney Futures Exchange,
air traffic control authorities in several countries throughout the world, and
call centers such as Great West Life, Legal and General, Thomas Cook and British
Gas.

      NICE also provides communication intelligence ("COMINT") systems that are
used primarily by government agencies to detect, identify, locate, monitor and
record transmissions from a variety of sources. NICE's principal COMINT system,
NiceFix, is a spectral surveillance and direction finding system that detects,
identifies, locates, monitors and records transmission sources. NICE markets its
COMINT systems primarily through electronic system integrators, such as TRW Inc.
and ELTA, taking advantage of the strengths of such companies in selling
integrated intelligence and electronic systems to governments.

      In January 1996 and July 1997, NICE had public offerings in the United
States of American Depositary Shares representing ordinary shares of Nice.
NICE's American Depositary Shares are listed for quotation on the NASDAQ/NMS
under the trading symbol "NICEY". NICE's ordinary shares are traded on the TASE.

            Liraz Systems Ltd. ("Liraz"). Liraz and its subsidiaries and
affiliates develop and sell comprehensive computerized business system solutions
in Israel and abroad. In Israel, Liraz specializes in system integration
services and the development of software solutions in the banking,
manufacturing, health care, retail and petroleum areas as well as the provision
of outsourcing services. Liraz's subsidiaries and affiliates include the
following companies:

      o Level 8 Systems, Inc., formerly named Across Data Systems, Inc., a 51.9%
owned subsidiary which develops and markets business software and provides
consulting and ancillary services. Level 8's principal business is the
development and sale of middleware software products and services which utilize
messaging and object technology to solve enterprise-wide integration problems
associated with linking centralized computer systems, desktop computers and the
Internet. Middleware products facilitate communication among applications that
reside on distributed and often incompatible hardware and software. Level 8 also
offers a manufacturing resource planning software package for use in managing
manufacturing operations and reporting financial results, as well as related
installation, training and support services. In addition, Level 8 provides
consulting services for enterprise messaging and for the manufacturing and
financial services industries. Level 8's stock is traded on the NASDAQ/NMS under
the trading symbol "LVEL".


                                      I-18
<PAGE>

      o Yaana Systems Ltd., a 74.7% owned subsidiary which specializes in
outsourcing services, payroll, labor management and complete application
packages. Yaana's stock is traded on the TASE.

      o Bintel Systems Ltd., a wholly-owned subsidiary which develops and
markets new artificial intelligence applications, including marketing business
intelligence (MBI), which organizes information from raw data into a concise
decision-making tool for executive management.

      o Kedem Computer and Information Systems Ltd., a 60.6% owned subsidiary
which offers professional courses in computer systems.

      o ASE Advanced Systems Europe B.V., a wholly-owned subsidiary based in the
Netherlands which provides software and system integration services for the
Benelux countries.

      o Burford International Applications Ltd., a wholly-owned subsidiary based
in England which provides complete global business solutions for financial and
commercial industries on personal computer and UNIX systems.

      The stock of Liraz is traded on the TASE.

            RDC-Rafael Development Corporation Ltd.("RDC"). RDC was established
in July 1993 to conduct the commercialization of non-military applications of
technologies developed by Rafael Armament Development Authority, a division of
the Israel Ministry of Defense ("Rafael"). Rafael is one of Israel's largest
industrial enterprises and Israel's largest research and development
organization.

      The two shareholders of RDC are DEP Technology Holdings Ltd., a company
owned equally by PEC, Discount Investment and Elron, who are all members of the
IDB Group, and Galram Technology Industries Ltd., the Israeli governmental
entity in charge of the commercialization in non-military markets of Rafael's
technologies.

      RDC, through its interests in the following companies, is working on
several projects, including the development of the products and processes set
forth below:

      o Geotek Communications, Inc., which has developed and is marketing in
certain areas, primarily in the United States, a wireless telecommunications
network that provides full duplex service, utilizing frequency-hopping multiple
access technology. RDC acquired most of its interest in Geotek as a result of
its transfers to Geotek of its equity and debt interests in


                                      I-19
<PAGE>

PowerSpectrum Technology Ltd. for shares of common stock of Geotek. Geotek's
stock is traded on the NASDAQ/NMS under the trading symbol "GOTK".

      o Witcom Ltd., which is developing millimeter wave radio - based digital
networking solutions that provide higher transmitted output power and superior
receiver sensitivity for a wide range of applications such as cellular telephone
systems, local loops, local exchange bypass and local area networks. RDC owns
60% of Witcom and PEC, Discount Investment and Elron each own 6.67% of Witcom
which they acquired in February 1998.

      o Oramir Semiconductor Equipment Company Ltd., which is developing the
L-Stripper, an innovative process that allows the removal by laser of
photoresist in the manufacturing process of silicon wafers used in the
semiconductor industry.

      o Semiconductor Engineering Laboratories (SELA) Ltd., which manufactures
and markets a line of semiautomatic micro-cleaving systems which produce a cross
section of semiconductor wafers for later examination by a scanning electron
microscope for the purposes of failure analysis and process monitoring.

      o Galil Medical Ltd., which develops, manufactures and markets medical
systems for cryotherapy of tissue during general surgery as well as minimally
invasive procedures.

      o VSOFT LTD., a software company that integrates solutions and develops
applications in the areas of digital video, database management and real time
information systems.

      o 3DV Systems Ltd., which is developing a camera that utilizes laser
technology to produce a three-dimensional picture.

      o Medicard Ltd., which is developing products for vascular surgery,
cardiac surgery and other areas of cardiology based on pulsatile technology.

      o VerdEco Technologies Ltd., which has developed an in-situ analysis
device that monitors the presence of heavy metals in water and wastewater.

      o Given Imaging Ltd., which is developing a swallowable video capsule
designed to pass through the digestive system while transmitting real-time color
video images of the small intestines.

     RDC also manages a research and development fund which is currently
supporting one project for the development of satellite communication equipment
utilizing millimeter waves for commercial application such as transmission of
television, high data rates


                                      I-20
<PAGE>

and Internet services, another project for the dynamic allocation of frequencies
to cellular telephone subscribers in order to improve channel capacity and
service quality and a third project for the integration of silicon and gallion
arsenide components on a silicon wafer in order to create a complete radio on a
chip.

      Gemini Israel Fund L.P. ("Gemini") and Advent Israel Limited Partnership
("Advent Israel"). In 1993, PEC, Discount Investment, Advent International
Corporation, an American company that initiates and manages venture capital
funds, and a corporation formed by the Israeli government ("Yozma"), established
a $36 million investment program with two components, Gemini and Advent Israel.

      Gemini is a venture capital limited partnership that invests in high
technology companies located in Israel, especially those that are export
oriented and are in the early stages of their development. Advent Israel is a
venture capital limited partnership managed by Advent International that
acquires interests in high technology companies that are either located in
Israel or whose businesses are related to Israel. Advent Israel is a limited
partner in Gemini.

      Advent Israel and a parallel limited partnership have received $20 million
of capital from their partners, of which Advent Israel and such limited
partnership have invested $10.75 million in Gemini and have invested or plan to
invest $9.25 million in portfolio companies. Gemini has received approximately
$26.75 million of capital from its partners. Together, Gemini and Advent Israel
constitute a substantial venture capital program whose purpose is to invest in
companies located in Israel or related to Israel. PEC has contributed $3 million
of capital to Gemini. In January 1998, the partners in Gemini other than Yozma,
namely PEC, Discount Investment, Scitex and Elron (two of PEC's affiliated
companies) and Advent Israel, exercised an option granted by Yozma when Gemini
was formed to purchase Yozma's ownership interest in Gemini and PEC's ownership
interest in Gemini increased from 11.2% to 16%. Gemini may offer PEC and the
other partners the opportunity to purchase interests in entities in which Gemini
is acquiring an interest.

      At the end of 1997, Gemini had invested approximately $24.5 million in 27
companies, including $5 million invested in 1997. Gemini is now fully invested.
Among the corporations in which Gemini has an equity interest are the following:

      o LOGAL Educational Software and Systems Ltd., a corporation that
designs, creates, publishes and markets simulation-based, educational
software products for science and math curriculums in high schools and
colleges (more fully described below). PEC also has a direct

                                      I-21
<PAGE>

interest in LOGAL.

      o Angiosonics Ltd., a developer and manufacturer of vascular ultrasound
systems for the removal of arterial obstructions.

      o Commtouch Ltd., a corporation engaged in the development of electronic
messaging solutions, including an e-mail product for the home consumer market
and a method to use e-mail as a multimedia promotional and delivery vehicle for
Internet advertising - so called "netvertising".

      o Client/Server Technology (CST) Ltd., a developer of software that
converts "Legacy" systems to distributed client/server environments such as MS
Windows and Java.

      o Combact Diagnostic Systems Ltd., a developer of a novel and proprietary
automated system for rapid bacterial analysis of urine.

      o Verisity Ltd., a corporation that designs and develops software tools
that assist designers of electronic devices, such as integrated circuits, to
verify the correctness of their designs.

      o Aisys Ltd., a designer and developer of software for automatic
programming of silicon microcontrollers to operate peripherals.

      Since its inception, Gemini has disposed of its equity interests in three
corporations for a gain of approximately $3.3 million on a total cost of
approximately $2.2 million.

      PEC is also a limited partner in Advent Israel and has contributed
$500,000 of capital to Advent Israel. As a limited partner in Advent Israel, PEC
has an indirect interest in all of Advent Israel's holdings other than Advent
Israel's interest in Gemini. At the end of 1997, Advent Israel had directly
invested approximately $8.4 million in 24 companies other than Gemini. Among the
corporations in which Advent has an equity interest and Gemini does not are a
developer of airless fluid spraying devices and a corporation which uses voice
compression technology for high-quality Internet voice transmissions.

      Gemini Israel II Limited Partnership ("Gemini II"). Primarily as a result
of Gemini investing substantially all of its funds, in 1997, PEC, Discount
Investment and Advent International Corporation established Gemini II, a venture
capital limited partnership that acquires interests in high technology companies
that either are located in Israel or whose businesses are related to Israel.
Gemini II and parallel limited


                                      I-22
<PAGE>

partnerships have received capital commitments of approximately $110 million.
PEC has agreed to contribute $1.5 million to Gemini II, of which it has
contributed $450,000 as of March 25, 1998.

      As of February 28, 1998, Gemini II had invested $16.7 million in 12
companies, including the following corporations:

      o Oridion Medical Ltd., a developer and manufacturer of carbon dioxide
monitoring machines and portable breath test analyzers.

      o Oramir Semiconducter Equipment Company Ltd., a corporation that is
developing the L-stripper, an innovative process that allows the removal by
laser of photoresist in the manufacturing process of silicon wafers used in the
semiconductor industry. RDC has also invested in Oramir.

      o Butterfly VLSI Ltd., a corporation that designs and develops advanced
spread-spectrum wireless chip sets for personal computers.

      o Novadent Ltd., a company that is developing an ultrasonic cavities
detector, a noninvasive and radiation-free device for the detection of cavities
at sites near contact areas between teeth with more accuracy than using X-rays.

      Electronics Line (E.L.) Ltd. ("Electronics Line"). Electronics Line is
engaged in the design, development, production and international marketing of
advanced electronic home and business alarm and security systems. Its products
include passive infrared, dual technology and glass break detectors, alarm
control panels, wireless encoders, transmitters and repeaters, closed camera
television observation systems and radio or telephone operated devices for
long-range communication with central monitoring stations. Electronics Line has
been innovative in the application of radio communication and infrared and
microwave technologies to several devices. Electronics Line generates more than
90% of its revenues from sales outside of Israel. Electronics Line's stock is
traded on the TASE.

      Libit Signal Processing Ltd. ("Libit"). Formed in 1994, Libit develops
integrated circuits for use by original equipment manufacturers in the cable
industry for broadband digital communication applications such as Internet
connectivity and broadcast digital television. The acceptance of a single
standard for two-way broadband digital communication over cable television
systems is critical to Libit's business potential. Libit has agreements with
Fujitsu and Analog Devices under which both companies manufacture integrated
circuit components according to Libit's designs and specifications. Toshiba


                                      I-23
<PAGE>

Corporation has standardized its entire digital cable television product line
based on Libit's technology.

      Lipman Electronic Engineering Ltd. ("Lipman"). Lipman develops,
manufactures and markets a variety of sophisticated microprocessor-based
electronic and computerized systems primarily for communication applications,
incorporating imaging and scanning technologies. Lipman's products include
telephone line and wireless point of sale/electronic fund transfer retail
business payment terminals, electronic cash registers and thermal and impact
printers. These products include credit, debit and smart card technologies. In
addition, Lipman manufactures a compact desk-top home services and betting
terminal and coin-operated or credit, debit or smart card vending machine
payment systems for use with commercial washers and dryers, photocopiers and
other vending machines and for garages and gasoline stations. Lipman has also
developed a unique hand-held pen-sized multilingual scan translator. Lipman's
stock is traded on the TASE.

      Tradanet Electronic Commerce Services Limited ("Tradanet"). In November
1997, PEC, Discount Investment and GE Information Services, a global leader in
business-to-business electronic commerce solutions and a unit of General
Electric Company, formed Tradanet, which will provide electronic commerce
services in Israel. GE Information Services agreed to transfer to Tradanet
technology and business know-how and to supply Tradanet with its Electronic Data
Interchange (EDI) platform, a value-added business communications service which
makes possible the electronic interchange of commercial, administrative,
financial and shipping documents. The EDI platform has been designed to
streamline trading procedures and transactions, add reliability compared to
traditional data and document interchange, save costs and improve the user's
productivity. Approximately 100,000 companies use the EDI platform throughout
the world. Tradanet will also offer Internet based products that will connect to
the Value Added Network of GE Information Services. In December 1997, Israel's
Ministry of Communications granted Tradanet a license to operate electronic
commerce services in Israel. Tradanet expects to begin operations during the
first half of 1998.

      Soreq Development Center (S.D.C.) Ltd. ("Soreq"). Soreq develops
non-military commercial applications of nuclear technologies derived at The
Center for Nuclear Research, Nahal Soreq (the "Research Center"), a division of
the Israeli Ministry of Defense, and operates a technological incubator for the
development of high technology companies with the support of Israel's Ministry
of Industry and Trade. PEC and Discount Investment own 50.1% of Soreq and Isorad
Limited, an Israeli government corporation established for the purposes of
commercially developing the technologies of the Research Center,


                                      I-24
<PAGE>

owns 49.9% of Soreq. The Research Center and Isorad have granted Soreq licenses
to use the technologies of the Research Center that Soreq desires to develop.

      Among the projects Soreq is developing are a gamma camera with a
lightweight, miniaturized camera head, a process for the clean up of industrial
and radioactive waste water contaminated with heavy metals, a radioactive
catheter for both treatment and imaging, an ion beam for wafer cleaning and
lasers for medical and industrial applications.

      Soundesigns Multimedia Communication Systems Ltd. ("Soundesigns"). Formed
in 1993, Soundesigns develops, produces and markets products that integrate the
telephone, the personal computer and telephone, data and Internet networks.
Personal computers connect with external systems, such as the Internet, through
an entrance, such as a modem or network card, which, when in use, prevents the
computer from connecting to another communication channel such as the telephone.
Soundesigns' principal product, introduced in 1997, is a patented technology
called "SoundWare" that integrates the telephone and a telephone line into any
standard personal computer sound card.

      Using SoundWare, Internet telephone calls can be made directly from the
telephone rather than having to use the personal computer's microphone and
speakers. In addition, SoundWare permits a personal computer to automatically
dial the least expensive telephone carrier at the time of the phone call, thus
reducing long distance phone bills.

      Soundesigns believes that SoundWare is attractive to manufacturers because
it is universal - working with any standard sound card without requiring any
circuit redesign - and is cost-effective. Final testing of SoundWare has begun
and marketing of SoundWare has started.

      Soundesigns also licenses its TapiVision software which enables developers
of telephony applications for Microsoft's Windows software to monitor the
functioning of their applications. Users of TapiVision include Lucent
Technologies, Siemens, Digicom and Genoa Technologies Ltd.

      LOGAL Educational Software and Systems Ltd. ("LOGAL"). LOGAL designs,
creates, publishes and markets interactive, simulation-based educational
software products for science and math curriculums in high schools and colleges.
LOGAL markets 29 product titles which are based on an "active" approach to
learning in the areas of biology, chemistry, physics, economics and mathematics.
All of LOGAL's products are available on both Macintosh and Windows operating
platforms as well as over the Internet.


                                      I-25
<PAGE>

      LOGAL's line of science and math products incorporate dynamic solutions
which actively engage students in the learning process and are easy to use and
can be customized to meet the individual needs of students and teachers. LOGAL's
science and economic products are based on a proprietary simulation engine,
Explorer, and are designed around a common platform that reduces the development
time, the cost of new product titles, and facilitates product updates. To date,
over 4,000 schools in the United States have purchased LOGAL's products. In
1997, LOGAL began to offer its science and math products over the Internet using
LOGAL.net, a proprietary browser. LOGAL sells its products through its own sales
force and through distributors.

      LOGAL's stock is traded on the NASDAQ/NMS under the trading symbol
"LOGLF".

      PAMOT Jersey US L.P. ("PAMOT US"). PAMOT US is one of five parallel
limited partnerships (the "PAMOT Fund") formed in October 1996 for the purpose
of acquiring equity interests primarily in companies established to develop
early-stage projects based on technologies developed at the Weizmann Institute
of Science (the "Weizmann Institute"). The PAMOT Fund has received capital
commitments of $20.5 million. PEC and Discount Investment have each committed to
contribute $500,000 to the capital of the PAMOT Fund, of which $250,000 has been
paid by each of them as of March 25, 1998.

      The PAMOT Fund has an agreement with Yeda Research and Development Company
Ltd., the entity that holds all property rights to inventions developed at the
Weizmann Institute, under which the PAMOT Fund has a first opportunity right to
evaluate all technology and projects with commercial potential developed within
the Weizmann Institute that are available for investment. If the PAMOT Fund
desires to develop a project, it and Yeda must agree upon a budget for the
company formed to develop the project and the project company will enter a
research and license agreement with Yeda. The PAMOT Fund will acquire an 80%
equity interest in the project company, and Yeda and the supervising inventor
scientists as a group will each acquire a 10% equity interest. In addition, Yeda
will receive 15% of the distributable gains to the PAMOT Fund. The PAMOT Fund
may not contribute more than $3.075 million to the capital of a project company.

       To date, the PAMOT Fund has purchased interests in six early stage
companies, three of which utilize technologies developed at the Weizmann
Institute. The businesses of such companies include the design of antibacterial
peptides that destroy the walls of bacteria and infected cells but do not affect
the walls of normal cells; the development of orally active iron scavengers for
the treatment of iron overload


                                      I-26
<PAGE>

condition; the design and development of optical elements for incorporation into
lasers in order to produce a compact laser that has a low divergence of the
output beam; the development of a novel diagnostic tool for the detection of
colon cancer; the development and commercialization of proprietary cellulose
binding domain technology; and the development of an ultrasonic cavities
detector.

      Incubator for Technological Entrepreneurship Kiryat Weizmann Ltd.
("Incubator Company"). Incubator Company, an affiliate of the Weizmann Institute
of Science, provides funding, managerial expertise, administrative support and
facilities to initial development stage companies that Incubator Company
believes can successfully develop products for commercial use utilizing novel
technologies. PEC has agreed to purchase a 5% interest in up to 12 new companies
that are admitted to the Incubator Company program for a purchase price of
$10,000 for each 5% interest. Generally as part of its purchase, PEC will
receive the right to increase its interest in each new company by an additional
8% if an interest in the new company is purchased by a third party. The purchase
price of such 8% interest will be based on the purchase price paid by the third
party.

      PEC has purchased interests in eight companies in the Incubator program.
The businesses of such companies include the development of transparent,
electrically conductive polymers for use in the electronics industry; the design
of equipment for improved processing and production of tomato seeds; the
development of technology for the production of liquid absorbing polymers with
variable absorbing capacity; the development of a transducer for high precision
measurement of angular coordinates; the design and development of a novel method
for cutting and coating heavy gauge metals; the development of high quality
personal care and dermatological products derived from whey, a completely
natural source, containing vitamins, lactic acid, protein and many minerals; the
commercial development of ultrastable enzymes for either improved performance in
commercial applications where enzymes are presently used or new applications for
which enzymes are not presently used because of insufficient durability; and the
development of a technique for increasing the digestibility of cellulose rich
wastes of feed-stuff (such as wheat or rice straw) used in the feeding of farm
animals.

Industry

      Tambour Ltd. ("Tambour"). Tambour is Israel's largest paint manufacturer.
Its products include a wide range of water-based and synthetic paints,
polyurethanes, epoxies, varnishes, texture coatings and primers, as well as
special purpose paints for aviation and marine applications. Tambour currently
supplies approximately 60% of Israel's decorative paint requirements and


                                      I-27
<PAGE>

exports its products throughout the world.

      Tambour conducts its operations through the following four major companies
or divisions:

      o Tambour Decorative Paint Division, the division responsible for the
manufacture and sale of decorative paints and decorative wall-facing bricks for
home and building use. This division also is responsible for the adhesives,
additives and sealants produced by Tambour's 56% owned subsidiary, Serafon
Resinous Chemicals Corporation Ltd. ("Serafon"), for the construction industry.

      o Tambour Industrial Paints Division, the division that produces and
markets industrial paint products, emulsions and resins, including automotive,
industrial maintenance, specialty marine and aviation coatings. This division
also includes the printing ink operations of Tambour's 80% owned subsidiary,
Tzah-Israeli Printing Inks Ltd., and the emulsion and polymer business of
Serafon for customers in the industrial and construction fields.

      o Tambour Ecology Ltd., a company in which Tambour has a 66% ownership
interest, produces and markets water treatment facilities, chemicals, metal
treatment chemicals and industrial sewage treatment systems. This division also
includes Tambour's affiliate, Safety Kleen Israel Ltd., which provides
environmental services for parts cleaning and solvent recycling, and Tambour's
71% owned subsidiary, SDL Technologies (SOL) Ltd., which treats and purifies
industrial and municipal waste water and purifies water for drinking needs,
using concentrated solar radiation.

      o Logistics Division, the service division which coordinates the purchase
of raw materials, shipment of products, storage of materials at warehouses and
the distribution of finished products to purchasing agents.

      Tambour also holds a 20% interest in "Ace/Kne Uvne", a chain of ten
"do-it-yourself" stores in Israel selling building and home improvement
products. Super-Sol Ltd. holds a 40% interest in "Ace/Kne Uvne".

      In addition, Tambour's 82% owned subsidiary, Kedem Chemicals Ltd., has
formed a joint venture with Diversey Lever, named Diversey Lever Israel Ltd., in
which Kedem has a 49.9% interest, which manufactures and distributes cleaning,
disinfecting and maintenance products for the institutional and industrial
markets.

      The stocks of Tambour, Serafon and Kedem are traded on the TASE.


                                      I-28
<PAGE>

      Tefron Ltd. ("Tefron"). Tefron manufactures boutique-quality everyday
intimate apparel sold throughout the world by such name-brand marketers as
Victoria's Secret and Warnaco/Calvin Klein. Through the utilization of
manufacturing technologies and techniques developed or refined by Tefron, Tefron
is able to mass-produce boutique-quality garments featuring unique designs
tailored to its customers' individual specifications at competitive prices.
Tefron's products include knitted briefs, tank tops, loungewear, nightwear,
bras, T-shirts and bodysuits, primarily for women.

      Tefron's operating strategy is to apply its manufacturing technologies and
techniques to meet the fashion and merchandising needs of its customers. Tefron
has redesigned and streamlined the production process for intimate apparel,
which has historically been labor intensive, to increase substantially the
computerization and automation of its sewing and cutting operations, achieving
higher levels of product quality and consistency and reducing labor costs.

      Tefron seeks to develop strong relationships with large name-brand
marketers of intimate apparel and to become their principal supplier for
products which Tefron manufactures. Tefron believes that by collaborating with
customers in the design and development of its products, it strengthens its
relationships with its customers and improves the quality of its products.

      In September 1997, Tefron had an initial public offering of its ordinary
shares in the United States and its ordinary shares are traded on the New York
Stock Exchange under the trading symbol "TFR".

      Caniel-Israel Can Company Ltd. ("Caniel"). Caniel is Israel's largest
manufacturer of cans and metal containers for processed and canned foods, soft
drinks and beer. Caniel utilizes the latest technology to produce a full line of
high quality products. It is Israel's only manufacturer of beverage cans.

      Caniel also manufactures metal packaging for a variety of industrial and
household products such as paints, lubricants, detergents and aerosols.
Substantially all of Caniel's cans are sold to customers in Israel. In recent
years, Caniel has begun to export aerosol cans to Europe. Caniel also produces
biodegradable plastic bottles for soft drinks.

      Caniel has formed a joint venture with a Jordanian corporation to
construct and operate a can manufacturing plant in Jordan. The cans manufactured
at this plant will be sold to


                                      I-29
<PAGE>

customers in Jordan and other countries in the Middle East. Caniel expects the
plant to start operations in 1998.

      Caniel's stock is traded on the TASE.

      Klil Industries Ltd. ("Klil"). Klil is engaged in aluminum extrusion,
including casting of billets, manufacturing of extrusion dies and painting of
extrusions. Klil is a leading supplier of aluminum extrusions in the form of
semi-finished, painted and mill-finished products for industry, as well as
finished aluminum products to the building industry, such as windows, doors,
curtain walls and shutters. Most of Klil's products are sold in Israel. Among
Klil's marketing methods are the distribution to architects and other
professionals of software discs that contain computerized drawings of Klil's
products.

      Klil operates two plants in Israel. The plant in Kiryat Motzkin, covering
53,000 square meters, houses Klil's headquarters, manufacturing facilities and a
training center for customers to learn how to assemble and install products
manufactured by Klil. Klil's 124,000 square meter, state-of-the-art factory in
Carmiel, Israel has modern production lines for extruding and painting
extrusions. Klil's stock is traded on the TASE.

      Mul-T-Lock Ltd. ("Mul-T-Lock"). Mul-T-Lock, through its four manufacturing
divisions, designs, manufactures, markets and distributes high security
products, including a wide range of sophisticated cylinders and padlocks,
automobile protection products, decorative security doors, blast and
gas-resistant doors and windows, fire resistant doors and safes and
sophisticated machines for product manufacture and assembly. Some of these
products incorporate high technology electronic applications. Many of
Mul-T-Lock's products are protected by patents and proprietary designs.

       Mul-T-Lock's manufacturing plants cover 300,000 square feet. Mul-T-Lock
markets its products throughout Israel and exports them worldwide through a
network of distributors and sales personnel of its subsidiaries. Mul-T-Lock's
stock is traded on the TASE.

      Ham-Let (Israel Canada) Ltd. ("Ham-Let"). Ham-Let designs, develops,
produces and markets high quality instrumentation valves and fittings in a
variety of markets for high pressure, temperature and vacuum applications.
Ham-Let's valves are sold to the chemical, energy, petrochemical and
biotechnology industries and are used as essential components in the transport
of ultra pure liquids and gases for the micro-electronic industry. More than 90%
of Ham-Let's revenues are generated from


                                      I-30
<PAGE>

sales outside of Israel. Ham-Let manufactures its fittings and valves at its
plant in Migdal Haemek, Israel. Ham-Let is constructing a new production and
operations center in Ziporit, Israel, near Nazareth, which will automate the
production and warehousing of Ham-Let's products.

      Ham-Let's stock is traded on the TASE.

      Maxima Air Separation Center Ltd. ("Maxima"). Maxima is Israel's second
largest producer of industrial and specialized gases, with a market share in
Israel of approximately 40%. Its primary products are nitrogen, oxygen and
argon. Nitrogen is used in the chemical, petro-chemical and food industries.
Oxygen is used primarily in hospitals and for welding in the metal industry.
Maxima's customers are mainly larger industrial users of gases.

      Maxima extracts nitrogen, oxygen and argon from the air at its two plants
in the Negev desert in southern Israel. Maxima also sells acetylene and has
facilities for mixing industrial gases and for filling containers with helium
and hydrogen. Maxima imports specialized gases for laboratories and for use in
the electronics industry.

      Praxair Inc., one of the largest American producers of industrial and
specialized gases, owns a majority interest in Maxima and is party to a
shareholders agreement with PEC and Discount Investment. The shareholders
agreement, among other things, (i) provides that as long as PEC and Discount
Investment own at least 20% of the ordinary shares of Maxima (or if Maxima sells
additional ordinary shares, as long as PEC and Discount Investment own at least
15%), they shall be entitled to designate not less than 25% of the members of
Maxima's board of directors, (ii) provides that Maxima's board of directors
cannot approve of certain actions, primarily those not in the ordinary course of
business, without the support of the directors designated by PEC and Discount
Investment, and (iii) grants each party certain purchase options and put options
upon another party's transfer of ordinary shares of Maxima.

      Maxima's stock is traded on the TASE.

Real Estate

      Property and Building Corporation Ltd. ("Property & Building"). Property &
Building is one of the largest real estate holding companies in Israel. It is
engaged, directly and through its subsidiaries and affiliates, in the
initiation, development, construction and sale of residential and commercial
buildings, the initiation, construction and rental of industrial parks and
office and commercial buildings, the purchase and development of land, and the
furnishing of financial services,


                                      I-31
<PAGE>

property management and property maintenance. Property & Building is also a
substantial shareholder in companies engaged in the citrus industry in Israel.
These companies accounted for approximately 33% of Israel's total citrus exports
in 1997.

      In the development of residential housing, it is Property & Building's
policy to develop and construct large, high quality apartment building projects
and sell the apartments principally to upper income purchasers; such projects
generally include recreational and commercial facilities. Property & Building
owns land in Tel Aviv, Jerusalem, Ramat Gan, Haifa and Herzliya on which it can
build approximately 4,333 apartments, of which 806 apartments are currently in
various stages of development and construction, including 390 apartments which
have been sold.

      Property & Building owns and rents to tenants approximately 458,000 square
meters of commercial floor space located mainly in prime areas. The occupancy
rate for Property & Building's rental properties is approximately 93%.
Subsidiaries of Property & Building constructed industrial and office buildings
in 1997 having 21,100 square meters of rental space and 15,500 square meters for
car parking and basement areas. Such companies are currently constructing
commercial, office and industrial buildings having 74,200 square meters of
rental space and 46,450 square meters for car parking and basement areas in Tel
Aviv, Ramat Gan, Jerusalem, Natayna, Lod and other areas.

      A subsidiary of Property & Building owns interests in modern sports
complexes in Israel and another subsidiary engages in the installation of
central heating and air conditioning systems.

      The stock of Property & Building and the stock of five of its subsidiaries
and affiliates are traded on the TASE.

Retail, Shipping and Other

      Super-Sol Ltd. ("Super-Sol"). Super-Sol is Israel's largest supermarket
chain (in terms of revenue), accounting for an estimated 39% of total sales by
supermarket chains and an estimated 14% of total retail sales of items typically
sold in supermarkets. Super-Sol believes it has maintained its leadership
position as a result of its (i) well stocked and well managed stores, (ii)
marketing innovations, (iii) product variety, (iv) store remodeling and
renovation program, (v) superior sites and (vi) flexibility in responding to
changing Israeli consumer food-shopping preferences.

      Super-Sol's 122 stores sell food and consumer items such as household
goods and textiles. Its chain includes 42 neighborhood Super-Sol stores, located
in upscale, residential urban areas, which cater primarily to high and middle
income families with


                                      I-32
<PAGE>

emphasis on a wide variety of high quality food products and services; 31 large
regional Hypercol stores, located primarily in shopping malls, commercial
centers and on commercial thoroughfares and serving predominately high and
middle income families with both food and other products; 32 Hypernetto stores
which sell a smaller variety of goods than other stores at substantially lower
prices and appeal to price-conscious customers; nine discount Gal-Yarok stores,
located primarily in lower income urban areas; five discount Birkat Rachel
stores offering specially certified Kosher products which cater to religious
shoppers; two membership warehouse-club Universe Club stores offering food and a
wide variety of non-food items at discount prices; and one Cosmos mega-store of
approximately 9,000 square meters that features larger selections, specialty
departments and significant space devoted to non-food items.

      In February 1997, Super-Sol acquired 25 retail food stores from the Shekem
department store chain. These stores (other than two which were closed) have
been integrated into Super-Sol's foregoing seven formats of food stores and are
now part of Super-Sol's 122 store chain.

      Super-Sol also operates a central computerized ordering center which
caters to customers in major metropolitan areas desiring to place orders by
telephone.

      Super-Sol's supermarket sales in Israel accounted for at least 90% of its
total revenues during each of the last five years. In addition to its Israeli
supermarket business, Super-Sol provides consulting and purchasing services and
supplies products to operators of convenience stores, independent supermarkets
and small supermarkets.

      In February 1998, Super-Sol sold its ownership interest in Super Kozert, a
chain of 27 supermarkets in metropolitan Budapest, Hungary.

      Super-Sol also holds a 40% interest in "Ace/Kne Uvne", a chain of ten
"do-it-yourself" stores in Israel selling building and home improvement
products. Tambour Ltd. also owns a 20% interest in "Ace/Kne Uvne".

      Super-Sol also holds equity interests in three shopping malls and two
commercial centers and in two commercial centers and one shopping mall currently
under construction.

      Super-Sol's ordinary shares are traded on the TASE.

      In October 1997, Super-Sol had a public offering in the United States of
American Depositary Shares ("ADSs"), each ADS representing five ordinary shares,
and the ADSs are listed for


                                      I-33
<PAGE>

trading on the New York Stock Exchange under the trading symbol "SAE".

      El-Yam Ships Ltd. ("El-Yam") and Financial Holdings El-Yam (Hamigdal) Ltd.
("FHEY"). El-Yam is engaged, through subsidiaries, in worldwide ocean
transportation of oil and dry bulk cargoes, such as grain, coal and iron ore.
Its fleet is operated under charters for varying durations. El-Yam has been
engaged in the worldwide shipping business for over 44 years.

      El-Yam owns nonvoting preferred stock of FHEY representing substantially
all of the equity in FHEY. FHEY in turn owns approximately 37.1% of IDB Holding.
IDB Holding owns through IDB Development approximately 81.35% of PEC's common
stock. PEC owns 10.1% of the voting shares of FHEY and Discount Investment owns
approximately 14.3% of such voting shares.

      Renaissance Fund LDC ("Renaissance"). Renaissance is a fund established in
1994 which raised approximately $135 million of capital. Its objective is to
generate capital appreciation through acquisitions of significant equity
interests primarily in a portfolio of Israeli and Israel-related privately held
and publicly traded companies.

      In October 1994, Renaissance was part of a group that purchased a 33%
equity interest in Paz Oil Company Ltd. ("Paz"), Israel's largest oil marketing
and distribution company. As a result of the purchase, Renaissance acquired a
14.3% equity interest in Paz for approximately $46.9 million. On January 3,
1997, Renaissance sold a 1.4% equity interest in Paz and realized a gain of $1.2
million on such sale. Paz is engaged in seven main businesses: gasoline service
stations, industrial lubricants and solvents, asphalt, liquid propane gas,
wholesale fuels, aviation fuel and real estate.

      In March 1995, Renaissance was part of a group which purchased from the
Government of Israel 100% of the shares of Shikun ve'Pituach le-Israel Ltd., one
of Israel's largest housing and development companies ("SHOP"). Renaissance
acquired a 20.1% equity interest in SHOP for approximately $23.7 million. In
February 1998, Renaissance sold its entire interest in SHOP for approximately
$25.12 million in cash and approximately $8.95 million in shares of Azorim
Development and Investments Company Ltd., a publicly traded real estate
development corporation in Israel, resulting in a gain of $10.4 million.

      Renaissance holds a 19.6% equity interest in Clalcom Ltd. ("Clalcom"), a
subsidiary of Clal Industries Ltd., which it purchased for approximately $7.2
million. Clalcom provides outgoing international facsimile services from Israel,
interactive voice response services and operates the "Sprintnet"


                                      I-34
<PAGE>

data network in Israel. In 1997, in response to capital calls from Clalcom,
Renaissance invested an additional $1.5 million to fund Clalcom's operations. In
1998, Clalcom made a new capital call, of which Renaissance's share is
approximately $550,000, which capital will be used to pay debt and fund
operations.

      Clalcom has a 44% interest in the joint venture Barak I.T.C. (1995) - The
International Telecommunications Services Corporation ("Barak"), which was one
of the winners of a tender for two additional licenses for international
telecommunications from Israel. Barak started operations at the end of June
1997. Barak does not expect to be profitable during its first four years of
operation, due in part to the high cost of market entry and access fees payable
to the state-owned telephone company. Renaissance holds an indirect 8.6% equity
interest in Barak.

      In 1996, Renaissance purchased for approximately $15 million a seven-year
4.5% convertible note of ECI Telecom Ltd., a provider of digital
telecommunications and data transmission services; acquired for approximately
$15 million equity securities of Indigo, N.V., a corporation that produces,
sells and services proprietary "Digital Offset Color" printing systems; and
purchased for approximately $10 million equity securities of Geotek
Communications Inc., a company that develops telecommunications products and
wireless communications systems based on frequency hopping multiple access
digital technology. The ordinary shares or common stock of ECI, Indigo and
Geotek are publicly traded on the NASDAQ/NMS under the trading symbols "ECILF,"
"INDGF" and "GOTK," respectively.

      Renaissance also manages a public securities portfolio whose cost was
$19.8 million as of December 31, 1997.

      General Engineers Limited ("General Engineers"). General Engineers sells,
installs and services equipment for the following markets in Israel: Energy -
power generation, power delivery and power control equipment; Medical -
diagnostic x-ray, ultra-sound and surgical equipment; Scientific - diffraction
and spectroscopy systems and electron microscopes; General Industry - a wide
variety of electrical and mechanical systems, and industrial diamonds; Factory
Automation - programmable controls and data acquisition systems; and Lighting -
lamps and luminaires. This variety of equipment is manufactured by various
United States, European and Japanese manufacturers. General Engineers is the
only distributor and service agent for certain General Electric (USA) equipment
in Israel, and represents in Israel, among others, Steris Inc., Lapp Insulator
Inc., Saftronics Ltd., Hitachi Instruments, GE-Fanuc, 3-L Filters and Rigaku Co.


                                      I-35
<PAGE>

      Isrotel Ltd. ("Isrotel"). Isrotel develops, owns, manages and operates
hotels in Eilat, Mitzpe Ramon, Tel Aviv and Zichron Ya'acov in the Carmel
mountain range, Israel. The nine hotels in the Isrotel chain have 2,106 hotel
rooms, of which Isrotel owns in whole or in part 1,588 rooms. Isrotel's hotels
are The King Solomon Hotel, Royal Beach Hotel, Sport Hotel, Lagoona Hotel,
Riviera Hotel, all of which are located on the North Beach in Eilat, the Red Sea
Sports Club Hotel, located on Coral Beach in Eilat, the Ramon Inn in Mitzpe
Ramon, Israel, the Tower in Tel Aviv and the Carmel Forest Spa Resort located
near Zichron Ya'acov.

      The nine hotels in the Isrotel chain serve a range of clientele from
customers interested in luxury vacations to those interested in family or sports
oriented vacations.

      Isrotel is currently constructing two new hotels on the North Beach of
Eilat, one named "Royal Garden Suites" with a total of 330 rooms and the other
named "Flamingo", which will be a three star hotel.

      Isrotel also owns a sailing, diving, recreation and sports club and a
travel agency.

      Isrotel's stock is traded on the TASE.

      Mondex Israel Ltd., ("Mondex"). In 1997, PEC, Discount Investment and Paz
Oil Company Ltd. established Mondex to offer an electronic smart card in Israel.
Mondex International, a corporation owned by MasterCard International and 27
banks from all over the world, has granted Mondex an exclusive license to use
the software, technologies, and know-how of Mondex International in Israel.
Mondex intends to offer the smart card beginning in the second quarter of 1998.
The card will be designed to be a complete alternative to cash and will permit
the transfer of money from card to card and the handling of up to five different
currencies. The smart card to be used by Mondex will also permit users to check
their balances, see the last 10 transactions that were performed and block
unauthorized usage. Mondex believes that its smart card will be the first such
card to be offered in Israel. The cards are expected to generate revenues from
businesses which allow the use of the cards and from the sale of machines needed
to operate the card.

Conditions in Israel

      Substantially all of the Company's Affiliates conduct their principal
operations in Israel and are directly affected by economic, political and
military conditions in that country. The manufacturing operations of certain of
the Affiliates are heavily dependent upon components and raw materials imported
from the


                                      I-36
<PAGE>

United States, several nations in Europe and other countries, and a substantial
majority of the sales of some Affiliates are made outside Israel. Accordingly,
the results of operations of the Company and substantially all of the Affiliates
could be adversely affected if major hostilities involving Israel should occur
or if trade between Israel and its present trading partners should be
interrupted for substantial periods.

      Since the establishment of the State of Israel in 1948, a state of
hostility has existed, varying in degree and intensity, among Israel and various
Arab countries. In addition, Israel and companies doing business with Israel
have been the subject of an economic boycott by the Arab countries since
Israel's establishment. Furthermore, following the Six-Day War in 1967, Israel
commenced administering the territories of the West Bank and the Gaza Strip and,
since December 1987, increased civil unrest has existed in these territories.
Although, as described below, Israel has entered into various agreements with
Arab countries and the Palestine Liberation Organization ("PLO") and various
declarations have been signed in connection with efforts to resolve some of the
aforementioned problems, no prediction can be made as to whether a full
resolution of these problems will be achieved or as to the nature of any such
resolution. To date, these problems have not had a material adverse impact on
the financial condition or operations of the Affiliates although there can be no
assurance that continuation of these problems will not have such an impact in
the future.

      A peace agreement between Israel and Egypt was signed in 1979 under which
full political relations were established; however, economic relations have been
very limited.

      In September 1993, Israel entered into a Declaration of Principles with
the PLO, which outlined interim Palestinian self-government arrangements. Prior
to the signing of the declaration, PLO Chairman Arafat sent a letter to the
Israeli Prime Minister in which the PLO recognized Israel's right to exist in
peace and security, renounced terrorism and violence, and affirmed that the
clauses of the PLO covenant denying Israel's right to exist are no longer valid.
In reply, Israel recognized the PLO as the representative of the Palestinian
people in the peace negotiations.

      In May 1994, Israel and the PLO signed an agreement in which the
principles of the September 1993 Declaration were implemented. In accordance
with this agreement, Israel transferred the civil administration of the Gaza
Strip and Jericho to the Palestinian Self-Rule Authority and the Israeli army
withdrew from these areas. On September 28, 1995, Israel and the PLO signed an
additional agreement regarding the transfer in stages of civil administration in
major Palestinian cities and


                                      I-37
<PAGE>

in certain other populated areas in the West Bank to the Palestinian Authority,
and the Israeli army withdrew from certain of such areas as well.

      On January 15, 1997, Israel and the Palestinian Authority signed a
Protocol Concerning the Redeployment in Hebron, with respect to the completion
of the first stage of Israeli redeployment in the West Bank. In addition, a Note
for the Record was agreed upon, reaffirming Israeli and Palestinian commitments
to the peace process and detailing certain measures for the continued
implementation of the September 1995 agreement.

      In October 1994, Israel and Jordan signed a peace treaty, which provides,
among other things, for the commencement of full diplomatic relations between
the two countries, including the exchange of ambassadors and consuls. In
addition, such treaty expresses the mutual desire of the parties for economic
cooperation and calls for both parties to lift economic barriers and
discrimination against the other and to act jointly towards the removal of any
economic boycotts by third parties. On December 4, 1996, Israel and Jordan
signed a trade agreement designed to liberalize trade between the two countries.

      Although Israel has held direct negotiations at different times since
October 1991 with Syria and Lebanon, Israel's neighboring countries on its
northern border, to end the state of hostility between them and establish peace,
to date such negotiations have not resulted in any agreement. Furthermore,
notwithstanding the agreements and joint declarations described above, the
relationships between Israel and Egypt and the PLO are not yet fully normalized.

      Recently there has been stagnation in the peace process in the Middle
East. No prediction can be made as to whether or how the "peace process" will
develop or what effect it may have upon PEC or the Affiliates.

      Generally, all male adult citizens and permanent residents of Israel under
the age of 51 are, unless exempt, obligated to perform up to approximately 39
days of military reserve duty annually. Additionally, all such residents are
subject to being called to active duty at any time under emergency
circumstances. Many of the Affiliates' officers and employees are currently
obligated to perform annual reserve duty. While the Affiliates have operated
effectively under these and similar requirements in the past, no assessment can
be made of the full impact of such requirements on the Affiliates' work forces
or businesses in the future, particularly if emergency circumstances occur.

      The results of operations of certain of the Affiliates have been favorably
affected to some extent by their participation in


                                      I-38
<PAGE>

Israel Government programs related to research and development, foreign currency
exchange rate insurance, taxation and capital investment incentives, some of
which have been reduced in recent years. Their results of operations would be
adversely affected if these programs were further reduced or eliminated and not
replaced with equivalent programs or if their ability to participate in these
programs were significantly reduced.

Demographics

      Since 1989, Israel has been experiencing a new wave of immigration
primarily from the former Soviet Union. Approximately 845,000 new immigrants
arrived through the end of 1997, of which approximately 66,000 arrived in 1997.
The future level of immigration is largely dependent on the political stability
of Russia and the other countries of the former Soviet Union.

      Although the increased immigration from the former Soviet Union may
benefit Israel and its economy in the long-term by providing highly educated,
cost competitive labor and by stimulating the economy's growth, the immigration
has placed an increased strain on government services, short-term economic
development and national resources. The Israeli Government has found it
necessary to raise additional revenue and to dedicate substantial funds to
support programs, including housing, education and job training, designed to
assist in the absorption of the new immigrants. No prediction can be made as to
the policies that will be adopted in the future or their effect on these or
other government spending programs.

      While a decrease in the rate of immigration would relieve strain on
government services, short-term economic development and national resources,
such a decrease could also have a negative effect on those Affiliates whose
revenues are derived mainly from the sale of products and services in Israel.
These Affiliates include housing developers, such as Property & Building,
manufacturers of supplies for the construction and housing industry, such as
Tambour, Klil and Mul-T-Lock, and purveyors of food and other necessities, such
as Super-Sol. No assessment can be made of the full impact of a significant
change in the flow of immigration on the results of operations of these
Affiliates or the other companies in which PEC has an interest.

      The State of Israel receives significant amounts of economic and military
assistance from the United States, averaging approximately $3 billion annually
over the last several years. In addition, in 1992, the United States agreed to
provide Israel with supplemental assistance in the form of up to $10 billion of
loan guarantees during United States fiscal years 1993-1998 to help Israel
absorb a large influx of new immigrants, primarily


                                      I-39
<PAGE>

from the republics of the former Soviet Union. In January 1998, Israel issued
$1.44 billion of 30-year U.S. Government-backed bonds, which was the last issue
conducted as part of U.S. Government guaranteed facility. Israel has used the
funds it has borrowed in 1993-1998 to bolster its foreign exchange reserves and
to fund increased investments, mainly in infrastructure. There is no assurance
that foreign aid from the United States will continue at or near amounts
received in the past. In January 1998, Israeli and American officials began
discussions concerning gradually ending the annual civilian aid package of $1.2
billion. If the grants for economic and military assistance or the United States
loan guarantees are eliminated or reduced significantly, the Israeli economy
could suffer material adverse consequences.

Economy

Overview

            Israel's economy continued to grow in 1997, but at a considerably
slower pace than in previous years. Gross domestic product (GDP) rose by 1.9%
last year to New Israel Shekel (NIS) 338 billion ($96 billion) compared with a
4.4% increase in 1996 and an annual average growth rate of 6% from 1990 through
1995. The 1997 GDP growth rate was less than the economy's potential, and lower
than the 2.4% increase in Israel's population, resulting in a 0.3% decrease in
per capita GDP.

            Business sector GDP rose by 2% in 1997 to NIS 225 billion ($64
billion), compared with a 5% increase in 1996 and an average annual rate of 7.2%
from 1990 through 1995. The reduced growth rate in business sector GDP reflected
a 2.5% increase in the GDP attributable to the industrial sector and a 4.9%
decrease in GDP attributable to the construction sector, resulting primarily
from a decrease in housing construction. Although overall economic activity in
Israel decreased in 1997, industrial exports increased by 10% in real terms to
$14.3 billion. Production and sales in the high technology sector continued to
grow, but at a slower rate than in previous years. Production and sales fell in
older, labor intensive industries, such as textiles, cardboard containers and
other wood and paper products.

            The lower economic growth rate last year resulted primarily from
reduced immigration, the government's comparatively tight fiscal policy which
reduced the government's budget deficit as a percentage of GDP, and the Bank of
Israel's policy of monetary restraint. In addition, much of the positive effect
on Israel's economy from the mass immigration at the beginning of the decade,
which resulted in higher consumption and domestic demand and a more flexible
labor force, has diminished and is no longer a force for new economic growth.


                                      I-40
<PAGE>

            One of the most positive economic developments in 1997 was the
reduction in the inflation rate. Israel's consumer price index (CPI) rose by 7%
in 1997, the lowest annual rate since 1969. This rate of inflation compares
favorably with the 10.6% increase in 1996 and the 8% increase in 1995, and was
at the low end of the government's targeted annual inflation range of 7% to 10%.

            The reduced inflation rate resulted primarily from the Bank of
Israel's policy of monetary restraint. The Bank of Israel lowered the rate of
interest it charges commercial banks on its funds three times during the first
half of 1997 from 14.7% to 12.7% as the rate of inflation slowed. However,
following relatively large increases in the CPI in June and July, the Bank of
Israel raised interest rates to 13.4% in order to bring inflation under control.
The high interest rates in Israel encouraged an influx of capital from abroad
(where interest rates were lower), resulting in Israel's foreign exchange
reserves increasing by $8.7 billion to a record level of $20 billion at the end
of 1997. The combination of high real interest rates and a strong shekel,
however, adversely affected investment and business sector activity and
contributed to Israel's economic slowdown.

            In 1997, the shekel was devalued 8.8% against the dollar, from NIS
3.251 to NIS 3.536, and by 4.2% against the currency basket, from NIS 3.635 to
NIS 3.786. In June, the Bank of Israel increased the range in which the exchange
rate of the shekel may fluctuate in furtherance of its policy of liberalizing
the foreign currency market and free capital movements.

            Private consumption rose by 3.3% in 1997, the lowest rate of
increase since 1990. Per capita private consumption increased by 0.9%
principally as a result of a 2% decrease in real terms in per capita disposable
income and reduced demand for automobiles, appliances and consumer electronic
goods from immigrants who arrived during the mass immigration and who have
already accumulated these items. The decline in per capita disposable income
reflected both the economic slowdown, which resulted in an increase in the
unemployment rate, and higher income taxes arising from an adjustment of tax
brackets. Although the decrease in per capita disposable income reduced the
growth rate of per capita private consumption, per capita private consumption
did not decrease because the rate of private savings as a percentage of
disposable income declined from 10% in 1996 to 8% in 1997.

            Investment in fixed assets declined by 6% in 1997, reflecting
decreases of 5.2% in housing construction, 6% in machinery and equipment, 14% in
transportation equipment and 7.6% in other construction work including
infrastructure and


                                      I-41
<PAGE>

development. Housing starts, which totaled 45,000 in 1997, 52,870 in 1996 and
63,470 in 1995, decreased because of reduced demand for housing and an increase
in housing supply. The Israeli government was unable to counter the slowdown in
business sector investments by increasing its own investment activity because
the government did not want to exceed its aggregate budget deficit goal of 2.8%
of GDP.

            Foreign trade continued to grow, but at a slower pace than in
previous years, reflecting the economic slowdown. Imports of goods and services
grew by 2.4% in real terms in 1997 to $32.9 billion, compared to 6.2% in 1996.
Exports increased by 7.7% to $24.2 billion, greater than the 6.3% increase in
1996 but comparable to the rate of growth in world trade. Since the growth rate
of exports compared to imports was higher in 1997 than in 1996 and the level of
fund transfers to Israel was relatively unchanged during the two years, the
balance-of-payments current account deficit fell to $3.5 billion in 1997 from
$5.4 billion in 1996.

            The increasing unemployment rate in 1997 was one of the more
troubling economic developments of the year. The unemployment rate rose to an
average of 7.8% in 1997 compared to an average of 6.7% in 1996. The increase in
unemployment was a direct result of the economic slowdown. In contrast, from
1995 until the end of June 1996, the unemployment rate fell from a record 11.2%
to 6.5%.

Foreign Trade

            Imports of goods and services grew by 2.4% in real terms in 1997,
compared with an annual average increase of 9.0% since 1990. This small increase
was a direct result of the economic slowdown, and reflected a real decrease of
1.0% in imports of goods, mainly raw materials and capital investment goods. The
decrease in imports of goods was more than offset by an 11.7% increase in the
import of services, such as services performed by foreign workers.

            Imports of goods excluding ships, planes and diamonds in 1997
decreased by 4.7% in dollar terms compared with the prior year. All import
components declined, including capital investment goods which fell 9.5%, raw
materials which decreased 3.7%, and consumer goods which declined 1.7%. This
reduction in imports reflected the adaptation of manufacturers to the economic
slowdown. As 1997 progressed, however, imports of goods grew, increasing at an
annualized rate of 15% in annual dollar terms during the fourth quarter compared
with an annualized decrease in dollar terms of 3.5% in the first quarter.


                                      I-42
<PAGE>

            Exports of goods and services grew by 7.7% in real terms during 1997
to $24.2 billion, compared with 5.0% in 1996 and an annual average of 11.7% from
1992 through 1995. Exports of services slowed in 1997 primarily because of the
11.3% decrease in tourism (which is regarded as an export) resulting from the
uncertain geopolitical situation.

            Industrial exports, excluding diamonds, grew by 12.2% in real terms,
reflecting the expansion of high technology industries and a 2% improvement in
Israel's terms of trade (a greater increase in export prices than in import
prices).

            Exports of goods to Southeast Asia reached $2.5 billion in 1997,
accounting for 11% of Israel's total exports. Approximately half of these
exports consisted of diamonds while the other half consisted of high technology
products. The adverse impact of the financial crisis in Southeast Asia on
exports to countries in that region was immediate, with a 26% decrease in dollar
terms in exports during the last quarter of 1997 compared with the average for
the first three quarters of the year. Diamond exports were particularly hard
hit, falling by 36%. The economic crisis and sharp devaluations in the currency
exchange rates of these countries will harm the competitiveness of Israeli
exporters who are already suffering from the real appreciation of the shekel
exchange rate in 1997.

Employment and Wages

            The increase in the unemployment rate in 1997 resulted from an
increase in the work force that was greater than the growth in the number of
jobs. The number of employed persons in 1997 rose to 2.0 million, an increase of
1.3% compared with a gain of 2.4% in 1996 and an annual average increases of
5.1% from 1990 through 1995. This lower rate of increase reflected reduced
employment in older, labor intensive industries, a 7.8% real increase in the
minimum wage during 1997 and a manpower shortage in the high technology
industries. During 1997, the labor force grew by 2.5% compared with 2.2% in
1996, and its proportion of the general population remained unchanged at 53.6%.

            Labor productivity fell by 0.9% in 1997 after rising by 0.8% in
1996. Labor productivity in the business sector decreased by 0.7% in 1997, after
rising by 1.4% in 1996. The reduction in labor productivity indicates that labor
costs have not adjusted to the decreased level of economic activity, which may
result in increased unemployment. However, labor productivity rose in the
industrial sector, excluding diamonds, by 2.8% in 1997, following an average
annual increase of 3.8% from 1992 through 1996. This continued growth of labor
productivity in the industrial sector reflected the growth in the


                                      I-43
<PAGE>

relative share of the high technology sector industries, where productivity
rates are particularly high.

            The number of foreign workers legally employed in Israel averaged
92,000 in 1997, 2% less than in 1996. The number of foreign workers illegally
employed in Israel is estimated at three times the number legally employed. Most
foreign workers are unskilled and constitute 65% of workers in the construction
sector and 20% of the agriculture sector. During the years when the Israeli
economy experienced rapid growth and decreases in the unemployment rate, the
influx of foreign workers helped to reduce wage increases and inflation. During
the current economic slowdown, the employment of foreign workers has aggravated
the unemployment situation, especially because employers are unlikely to
discharge foreign workers who accept lower wages than comparable Israeli
workers. In addition, the employment of large numbers of foreign workers
threatens to result in serious social problems in the long term.

            The average monthly wage of an employee reached NIS 5,500 ($1,555)
in 1997, a real increase of 1.7%, reflecting gains of 2.3% in wages of employees
in the business sector and 0.6% in wages of employees in the public sector. The
increase in business sector wages, despite the growth in unemployment, resulted
from the growing demand for high paid employees capable of working in high
technology industries, and the dismissal of low paid workers in older, labor
intensive industries.

The Budget

            Israel's aggregate government budget deficit in 1997 totaled NIS 8.1
billion ($2.3 billion), or 2.4% of GDP, below the government's targeted level of
2.8% of GDP. The government's domestic budget deficit of NIS 9.1 billion ($2.6
billion) was higher than planned, constituting 2.9% of GDP, while the government
had a budget surplus of 0.5% of GDP arising from its activities abroad,
primarily interest income on Israel's foreign exchange reserves.

            Government revenue amounted to NIS 124.5 billion ($35 billion) in
1997, while government spending reached NIS 133.6 billion ($38 billion). The $3
billion domestic budget deficit exceeded its targeted level of 2.0% of GDP by
0.9% because of the economic slowdown, which reduced domestic revenues by NIS
6.9 billion ($2.0 billion) and budgeted domestic spending by NIS 4 billion ($1.1
billion).

            The government's domestic budget deficit was financed primarily from
revenue of NIS 8.8 billion ($2.5 billion) from the privatization of government
businesses, a substantial increase from the NIS 400 million ($113 million) of
privatization revenue


                                      I-44
<PAGE>

realized in 1996. Net government borrowing from the public amounted to NIS 575
million ($163 million) in 1997 compared with NIS 7.9 billion ($2.2 billion) in
1996.

The Capital Markets

            The stock market enjoyed a year of rising prices in 1997 after three
difficult years. Average daily volume on the Tel Aviv Stock Exchange ("TASE")
grew to NIS 214 million ($61 million), almost double the average for 1996.
Twelve corporations had initial public offerings in Israel and 73 corporations
listed on the TASE had public offerings during the year. As a result, the value
of issuances of equity securities listed on the TASE, including convertible
securities, reached NIS 6.3 billion ($1.8 billion), a nearly three-fold increase
compared with 1996. Total equity issuances by Israeli corporations in Israel,
abroad, in private offerings and from the exercise of options, reached NIS 7.7
billion ($2.2 billion) in 1997. The majority of equity issuances on the Israeli
market in 1997 consisted of convertible securities, rather than stock.

            The general share index of stocks listed on the TASE rose by 26.4%
in 1997. In real terms, CPI-linked bonds rose by 2.4%, dollar-linked bonds went
up by 4.4%, and unlinked bonds increased by 6.4%. The market value of equity
securities listed on the TASE, including convertible securities, at the end of
1997 was NIS 160.5 billion ($45 billion), 9% more than the NIS 147 billion ($42
billion) value of the bond market.

            As noted earlier, the government raised a record NIS 8.8 billion
($2.5 billion) in 1997 from the sale of its holdings in corporations and banks.
Primarily as a result of such sales, the market value of the government's
holdings in publicly traded corporations as a percentage of the total market
value of all publicly traded corporations fell from 16% at the end of 1996 to
11% at the end of 1997. The government realized revenues in 1997 of NIS 1.7
billion ($500 million) from the sale of its holdings in corporations and banks
pursuant to stock exchange issuances compared with NIS 250 million ($71 million)
in 1996. The government received proceeds of NIS 740 million ($209 million) from
the sale of shares of Bank Leumi, NIS 210 million ($59 million) from the sale of
Israel Discount Bank and NIS 740 million ($209 million) from the exercise of
options previously issued by the government for shares of Israel Discount Bank
and Bank Leumi.

            Most of the NIS 7.1 billion ($2 billion) of privatization revenue
that was generated from private sales was attributable to four transactions: (i)
the sale of a 43% controlling interest in Bank Hapoalim to a consortium lead by
Ted Arison for NIS 4.9 billion ($1.4 billion); (ii) the disposition


                                      I-45
<PAGE>

of 25% of Bank Mizrahi's shares for NIS 450 million ($127 million); (iii) the
sale of a 17% ownership interest in Israel Chemicals for NIS 670 million ($189
million); and (iv) the disposition of 12% of Bezeq's equity to Merrill Lynch for
NIS 890 million ($252 million). The government also sold its holdings in two
non-stock exchange companies, namely, Hanal was sold for NIS 90 million ($25
million) and Yozma was sold for NIS 50 million ($14 million).


                                      I-46
<PAGE>

Item 2. PROPERTIES

            None.

Item 3. LEGAL PROCEEDINGS

            None.

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

            None.

Executive Officers of the Registrant

                                                            Date First
                                                            Elected to
Name                    Age     Position                      Office
----                    ---     --------                    ----------

Frank J. Klein(a)       55      President                   Jan. 1995

James I. Edelson(b)     41      Executive                   Feb. 1992
                                Vice President,
                                Secretary and
                                General Counsel

William Gold(c)         60      Treasurer                   Feb. 1992

            Officers are elected for a one-year term at the Annual Meeting of
            Directors scheduled in May or June of each year.

      (a)   Mr. Klein served as Executive Vice President of the Company from
            November 1977 to November 1991 and as Treasurer of the Company from
            May 1980 to November 1991. For more than 20 years prior to 1995, Mr.
            Klein was an officer of Israel Discount Bank of New York ("IDBNY"),
            serving as Executive Vice President of IDBNY from December 1985 to
            December 1994.

      (b)   Mr. Edelson is also U.S. Resident Secretary of IDB Holding.


      (c)   Mr. Gold was Secretary and Assistant Treasurer of the Company from
            August 1970 to February 1992.


                                      I-47
<PAGE>

                                     PART II

Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

      (a) The range of high and low sales prices of the Company's Common Stock
as reported on the New York Stock Exchange Composite Tape for each of the fiscal
quarters during the last two fiscal years are set forth below.

                 1996              High                Low
                 ----              ----                ---

          First Quarter          $24-3/4             $19-1/2
          Second Quarter          22-7/8              17-1/2
          Third Quarter             19                15-1/2
          Fourth Quarter          18-1/8                14

                1997               High                Low
                ----               ----                ---

          First Quarter          $21-1/2             $  17
          Second Quarter          25-1/8                18
          Third Quarter           24-1/4              18-3/4
          Fourth Quarter          22-3/8              18-1/2

      On March 25, 1998, the closing price of the Company's Common Stock on the
New York Stock Exchange was $21-3/8 per share.

      (b) As of March 25, 1998, there were 2,335 shareholders of record of the
Company's Common Stock.

      (c) The Company has not paid cash dividends since 1979. The decision not
to pay cash dividends reflects the policy of the Company to apply retained
earnings, including funds realized from the disposition of holdings, to finance
its business activities. 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 of Directors.


                                      II-1
<PAGE>

Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

     The following selected consolidated financial data for the years ended
December 31, 1997, 1996 and 1995, and at December 31, 1997 and 1996, are derived
from the audited consolidated financial statements of the Company set forth
elsewhere in this Annual Report which have been audited in 1997 by Price
Waterhouse LLP and Haft & Gluckman LLP, each independent public accountants, and
in 1996 and 1995 by Arthur Andersen LLP and Haft & Gluckman LLP, each
independent public accountants, as indicated in their reports included elsewhere
herein. The report of Price Waterhouse LLP and Haft & Gluckman LLP on the 1997
financial statements and the reports of Arthur Andersen LLP and Haft & Gluckman
LLP on the 1996 and 1995 financial statements are based in part on the reports
of other independent accountants whose reports also appear herein. The selected
consolidated financial data for the years ended December 31, 1994 and 1993, and
at December 31, 1995, 1994 and 1993, are derived from other audited consolidated
financial statements of the Company not appearing in this Annual Report which
have also been audited by Arthur Andersen LLP and Haft & Gluckman LLP.

<TABLE>
<CAPTION>
                                   1997       1996       1995       1994       1993
                                   ----       ----       ----       ----       ----
                      (In thousands of dollars except for per share amounts which are in dollars and
                      except for the number of shares which are in thousands of shares.)
<S>                             <C>       <C>        <C>        <C>        <C>
Income from:
   Equity in net income of
   Affiliated Companies         $ 48,538  $ 23,438   $ 23,720   $ 25,338   $ 33,542

Total Revenues                    88,630    44,535     42,065     40,798     60,648

Net Income*                       54,503    28,213     25,242     32,566     41,970

Net Income per Common Share*:
   Basic                            2.95      1.51       1.35       1.73       2.24
   Diluted                          2.92      1.49       1.34       1.72       2.23
Weighted Average Number of
Outstanding Common Shares         18,472    18,714     18,759     18,759     18,759

Total Assets                     461,104   407,703    392,967    383,691    347,873

Total Liabilities                 44,979    33,827     35,680     42,223     40,636

Shareholders' Equity             416,125   373,876    357,287    341,468    307,237

Common Shareholders' Equity
per Common Share                   22.66     20.20      19.05      18.20      16.38

Number of Outstanding Common
Shares at the End of Each Year    18,362    18,508     18,759     18,759     18,759
</TABLE>

*Net income for 1993 is after the cumulative effect of a change in accounting
for income taxes of $(1,174,000) or $(.06) per share of Common Stock. Net income
for 1994 is after the cumulative effect of a change in accounting for marketable
securities of $2,473,000 or $.13 per share of Common Stock. Net income is after
loss from discontinued operations of General Engineers Limited, net of income
taxes, of $380,000 for 1995 ($.02 per share), $104,000 for 1994 ($.01 per share)
and $67,000 for 1993 (no cents per share).

No dividends were paid during the last five years.


                                      II-2

<PAGE>

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

RESULTS OF OPERATIONS

Year Ended December 31, 1997
      Compared to Year Ended December 31, 1996

            Consolidated net income rose to $54.5 million for 1997, up from
$28.2 million for 1996. The rise in net income reflected increases of $25.1
million in equity in net income of Affiliated Companies, $9.5 million in net
gain on issuance of shares by Affiliated Companies, $5.8 million in net gain on
sales of investments in Affiliated Companies, $1.5 million in net gain on sales,
and changes in market value, of trading securities and $852,000 in other income.
The provision for income taxes increased by $16.7 million for 1997 compared
with 1996.

            Equity in net income of Affiliated Companies for 1997 rose to $48.5
million, up from $23.4 million for 1996. The increase reflected increased net
income in respect of certain Affiliated Companies, primarily Cellcom (of which
PEC's share was $11.3 million compared to a net loss of $3.5 million for 1996),
Elron and Liraz and reduced operating losses at Scitex (of which PEC's share was
$234,000 compared to a loss of $11.7 million in 1996). This increase was
partially offset by PEC's reduced net income in respect of some of its other
Affiliated Companies, particularly Tambour and Super-Sol (substantially arising
from a change in accounting relating to a financing transaction) and net losses
in respect of DEP Technology Holdings Ltd. (the company through which PEC holds
its ownership interest in RDC) and Soreq (arising from a write-off of acquired
in-process research and development because Soreq is a developmental stage
company).

            PEC realized a net gain on issuance of shares by Affiliated
Companies of $10.4 million for 1997 compared to $849,000 for 1996. PEC realized
net gains of $4.9 million on the sale of ordinary shares by Tefron in September
1997 in an initial public offering in the United States, $4.4 million on the
sale by Super-Sol of American Depositary Shares representing ordinary shares of
Super-Sol in a public offering in October 1997 in the United States and $1.0
million on the sale of ordinary shares by Gilat Communications in December 1997
in an initial public offering in the United States. During 1996, PEC realized
net gains of $745,000 and $470,000 from public offerings in the United States of
American Depositary Shares by Nice and ordinary shares of Logal, respectively.
These net gains were partially offset by a net loss of $405,000 on the issuance
of shares by Gilat Satellite in connection with Gilat Satellite's acquisition of


                                      II-3
<PAGE>

Skydata, Inc. in December 1996 through an exchange of all the outstanding equity
of Skydata for ordinary shares of Gilat Satellite.

            PEC realized a net gain on sales of investments in Affiliated
Companies of $8.3 million for 1997, up from $2.5 million for 1996. During 1997,
PEC realized net gains of $4.1 million, $2.9 million, $2.8 million and $2.7
million on sales of 2.6% of Tefron, 4.0% of VocalTec Ltd. (constituting PEC's
entire ownership interest in VocalTec), 1.4% of Super-Sol and 1.9% of Nice,
respectively, and net losses of $2.6 million, $557,000 and $541,000 relating to
PEC's sale of its ownership interests in RTS Telecommunications Services Ltd.,
Tius Elcon Ltd. and Bulk Trading Corporation, respectively, and a net loss of
$662,000 relating to the expiration of PEC's warrants to purchase shares of
Isrotel. During 1996, PEC realized net gains of $1.8 million, $1.7 million and
$210,000 on the sales of 1.6% of Nice, 1.2% of Super-Sol and 1.4% of VocalTec,
respectively, and a net loss of $1.2 million relating to PEC's sale of its
ownership interest in Bulk Trading.

            PEC's other income increased to $3.8 million for 1997 compared to
$3.0 million for 1996 primarily because of increased income from partnerships in
which PEC is a partner, particularly Gemini, and increased management fees.

            As described in Note 4 of the Notes to the Consolidated Financial
Statements for the year ended December 31, 1997 (the "1997 Notes"), PEC
provides deferred income taxes on undistributed earnings of, and gains on
issuances of shares by, Affiliated Companies that are not more than 50% owned
by the IDB Group and in which the IDB Group does not otherwise have effective
control. The Company does not provide deferred income taxes with respect to
undistributed earnings of, and gains on issuances of shares by, Affiliated
Companies that are more than 50% owned by the IDB Group or in which the IDB
Group otherwise has effective control and for which such amounts are
currently expected to be permanently reinvested (the "Majority-Owned
Affiliated Companies"). PEC's provision for income taxes for 1997 rose to
$21.5 million from $4.8 million for 1996 principally because of increased
income and a decrease in the proportion of income from undistributed earnings
of Majority-Owned Affiliated Companies.

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

            Consolidated net income rose to $28.2 million for 1996, up from
$25.2 million for 1995. The rise in net income primarily reflected increases of
$1.3 million in net gain on sales of investments in Affiliated Companies and
$1.8 million in other income as well as a decrease of $1.5 million in the
provision for


                                      II-4
<PAGE>

income taxes. Partially offsetting the rise attributable to these items were
decreases of $1.4 million in net gain on issuance of shares by Affiliated
Companies and $1.1 million in interest and dividend income.

            Equity in net income of Affiliated Companies of $23.4 million for
1996, compared with $23.7 million for 1995, was adversely affected by the net
loss of $178.3 million incurred by Scitex, of which $110 million was
attributable to restructuring and other charges, compared with a net loss of
$34.5 million in 1995, all of which was attributable to special charges. PEC's
share of the Scitex loss was $11.7 million in 1996, compared with $2.3 million
in 1995. The reduction in PEC's equity in net income of Affiliated Companies
also reflected write-offs of goodwill in respect of Liraz and Lego. Partially
offsetting these losses was increased net income in respect of certain other
Affiliated Companies, particularly Property & Building, DIC and PEC Cable TV
Ltd. (the corporation through which PEC holds its interest in Tevel), Tambour
and Tefron, and reduced losses in respect of Cellcom (of which PEC's share was
$3.5 million in 1996 compared to $6.9 million in 1995).

            PEC realized a net gain on sales of investments of Affiliated
Companies of $2.5 million for 1996 compared with $1.2 million for 1995. During
1996, PEC realized net gains of $1.8 million, $1.7 million and $210,000 on the
sale of 1.6% of Nice, 1.2% of Super-Sol and a 1.4% of VocalTec, respectively.
Partially offsetting these net gains was a net loss of $1.2 million on PEC's
sale of its entire ownership interest in Bulk Trading Corporation Ltd. at the
end of 1996. All of PEC's $1.2 million net gain on sales of investments for 1995
resulted from PEC's sale of a small portion of its shares of Gilat Satellite.

            PEC realized a net gain on issuance of shares by Affiliated
Companies of $849,000 for 1996 compared with $2.3 million for 1995. PEC realized
net gains on issuance of shares of $745,000 on the sale by Nice in January 1996
of American Depositary Shares representing ordinary shares of Nice in a public
offering in the United States and $470,000 on the sale by Logal in March 1996 of
ordinary shares in an initial public offering in the United States. These net
gains on issuance of shares by Affiliated Companies were partially offset by a
net loss of $405,000 on the issuance of shares by Gilat Satellite in connection
with Gilat Satellite's acquisition of Skydata, Inc. All of the net gain on
issuance of shares by Affiliated Companies in 1995 resulted from Gilat
Satellite's sale in October 1995 of ordinary shares in a public offering in the
United States.


                                      II-5
<PAGE>

            PEC's net gain on sales, and change in market value, of trading
securities for 1996 was $5.2 million, up from $4.5 million for 1995. PEC's other
income rose to $3.0 million for 1996 from $1.1 million for 1995 primarily
because of increased management fees and income from limited partnerships,
principally Renaissance.

            PEC's interest and dividend income decreased to $964,000 for 1996
compared with $2.1 million for 1995 primarily because PEC's liquid assets
decreased. Liquid assets were reduced principally because of the net purchases
of securities of new and existing Affiliated Companies and securities of other
Israeli companies.

            The provision for income taxes for 1996 decreased to $4.8 million,
down from $6.3 million for 1995. This decrease was attributable to the provision
of $3.0 million of additional income taxes in 1995 arising from PEC's sale of
nonvoting preferred shares of Israel Discount Bank of New York ("IDBNY") in
1995, which sale did not result in a gain for financial statement purposes.

            Although income before income taxes, loss from discontinued
operations and cumulative effect of accounting change was almost the same for
1996 and 1995, $33.0 million in 1996 compared with $31.9 million in 1995, the
provision for income taxes for 1996 was $4.8 million compared to $3.3 million
for 1995 after excluding the additional $3.0 million of income taxes
attributable to PEC's sale of nonvoting preferred shares of IDBNY. This increase
is primarily attributable to a decrease in the proportion of income from
undistributed earnings of Majority-Owned Affiliated Companies in 1996 compared
to 1995, in part because Super-Sol ceased to be a Majority-Owned Affiliated
Company in 1996 and PEC, therefore, provided deferred income taxes on its share
of undistributed earnings of Super-Sol in 1996.

SHAREHOLDERS' EQUITY

            The unrealized gain, net of taxes, from "available-for-sale
securities" that was included in shareholders' equity as of December 31, 1997
increased to $7.3 million from $1.9 million as of December 31, 1996. This
increase is primarily attributable to PEC changing its method for
accounting for its holdings in Nice from the equity method to treating its
holdings in Nice as "available-for-sale securities" (due to a reduction of
PEC's interest in Nice).

            As discussed in Note 2 to the 1997 Notes, translation differences
are reflected in shareholders' equity as a "Cumulative Translation Adjustment".
The exchange rate of the New Israel


                                      II-6
<PAGE>

Shekel declined approximately 8.8% against the U.S. dollar at the end of 1997
compared to the end of 1996. As of December 31, 1997, the Cumulative Translation
Adjustment reduced shareholders' equity by $40.9 million compared to a reduction
of $26.3 million at the end of 1996.

            In accordance with PEC's announcement in 1996 that it would
purchase up to 500,000 shares of its common stock from time to time in the
open market at its discretion, taking into account such factors as price and
prevailing market conditions, PEC purchased 146,200 shares of its common
stock for an aggregate cost of $3.0 million in 1997, reducing the number of
outstanding shares of PEC's common stock to 18,362,188. In 1996, PEC
purchased 250,200 shares of its common stock.

NEW ACCOUNTING PRONOUNCEMENTS

            In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 128, Earnings
per Share ("FAS 128"), which replaces the "primary" and "fully diluted"
calculations of earnings per share with "basic earnings per share" which
includes only actual net income and weighted average number of shares
outstanding and "diluted earnings per share" which includes the effect of any
common stock equivalents or other items that dilute income available to
common shareholders and/or weighted common shares outstanding for the
reporting period. PEC has implemented FAS 128 for 1997. PEC's "basic earnings
per share" and "diluted earnings per share" for 1997 is $2.95 and $2.92,
respectively.

            In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("FAS 130"), which
establishes standards for reporting and display of comprehensive income and
requires that all components of comprehensive income be reported in a
financial statement having the same prominence as other financial statements.
For PEC, FAS 130 is effective in 1998 and will require the reclassification
of prior period financial statements for comparative purposes. Adoption of
FAS 130 should have little effect on PEC'S financial statements since the new
requirements primarily involve modifications to the way that existing
information is displayed.

READINESS FOR YEAR 2000

            The Year 2000 compliance issues concern the ability of certain
computerized information systems to properly recognize date-sensitive
information as the year 2000 approaches. Systems that do not recognize such
information could generate erroneous data or cease to function.


                                      II-7
<PAGE>

            PEC and its Affiliated Companies utilize a number of computerized
information systems in conjunction with their operations. PEC has taken actions
to understand the nature of any work required to make its and its Affiliated
Companies' systems and infrastructure Year 2000 compliant. The financial impact
of becoming Year 2000 compliant has not been and is not expected to be material
to PEC's financial position or results of operations in any given year.

LIQUIDITY AND CAPITAL RESOURCES

            As of December 31, 1997, PEC's liquid assets (consisting of cash,
money market funds and marketable securities of U.S. companies) totaled
approximately $45.1 million. As discussed in Note 6 to the 1997 Notes, as of the
end of 1997 PEC had commitments extending over the next several years to make
capital contributions or loans of up to approximately $11.0 million to existing
Affiliated Companies. For the year ended December 31, 1997, PEC received cash
dividends and interest totaling $25.3 million (including $24.1 million of
dividends received from Affiliated Companies, which do not affect PEC's net
income for financial statement purposes), which substantially exceeded the
amount needed to pay PEC's general and administrative expenses.

            During 1997, PEC generated a total $43.8 million of liquid funds, of
which $30.5 million was realized from the sale of shares of Affiliated Companies
("Delek" - The Israel Fuel Corporation Ltd. - $7.7 million, Super-Sol - $6.9
million, Tefron - $5.6 million, VocalTec Ltd. - $5.0 million, Nice - $3.7
million and Lipman - $1.1 million), $12.9 million was realized from the sale of
marketable securities of U.S. companies and $412,000 was generated from the
repayment of loans.

            During 1997, PEC purchased equity and debt securities of, and
contributed capital to, new and existing Affiliated Companies and other Israeli
corporations for approximately $27.2 million. The new Affiliated Companies in
which PEC purchased securities in 1997 and PEC's purchase price for such
securities consisted primarily of Ham-Let - $3.7 million, Libit - $2.2 million,
Tradanet - $900,000 and Mondex - $860,000. The existing Affiliated Companies in
which PEC purchased securities in 1997 and PEC's purchase price for such
securities included Property & Building - $3.3 million, Cellcom - $1.8 million
(shareholder loans), Soreq - $1.6 million, RDC - $1.4 million, RTS
Telecommunications Services Ltd. and RPA Leasing Inc. - $1.4 million
contribution in connection with the disposition of those companies and Bulk
Trading Corporation - $1.0 million in connection with the sale of Bulk Trading.
In addition, PEC acquired a small ownership interest in a publicly-traded
Israeli corporation for $5.9 million and purchased a convertible debenture of
another Israeli corporation for $1.0 million. During 1997, PEC


                                      II-8
<PAGE>

purchased marketable securities of U.S. companies for approximately $18.5
million and purchased interests in limited partnerships that acquire marketable
securities of U.S. companies for approximately $6.0 million.

            During 1997, PEC purchased 146,200 shares of its common stock for
approximately $3.0 million.

SUBSEQUENT EVENTS

            During January and February 1998, PEC sold its entire ownership
interest in Lego Irrigation Ltd. for $2.6 million and will realize a net gain of
approximately $800,000 during the first quarter of 1998. In addition, PEC
purchased 2.4% of Property & Building during the first two months of 1998 for
approximately $7.8 million and purchased 4.1% of Super-Sol in February 1998 for
approximately $29.9 million. In connection with the purchase of the additional
ownership interest in Super-Sol, PEC borrowed $19.9 million from Israel Discount
Bank Ltd. pursuant to a line of credit. The line of credit is unsecured and
provides that the outstanding balance of the loan bears interest at the rate of
one week London Interbank Offered Rate (LIBOR) plus 0.5% per annum. The loan is
payable on demand. The line of credit expires on April 30, 1998.


                                      II-9
<PAGE>

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

            This item commences on the following page.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

            None.


                                     II-10
<PAGE>




                       REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                       ----------------------------------------


To the Shareholders and Board of Directors
of PEC Israel Economic Corporation:



We have audited the accompanying consolidated balance sheet of PEC Israel
Economic Corporation and subsidiaries (the "Company") as of December 31,
1997, and the related consolidated statements of income, shareholders' equity
and cash flows for the year then ended.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to express
an opinion on these financial statements based on our audit.  We did not
audit the financial statements of certain Affiliated Companies of the
Company, which statements reflect assets and revenues of 23% and 29%,
respectively, of the consolidated totals as of and for the year ended
December 31, 1997.  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 audit 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 audit and the reports of other auditors provide a reasonable
basis for our opinion.


<PAGE>

In our opinion, based on our audit and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of PEC Israel Economic Corporation and
subsidiaries as of December 31, 1997, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.







HAFT & GLUCKMAN LLP                          PRICE WATERHOUSE LLP


New York, New York
March 26, 1998




<PAGE>



                       REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                       ----------------------------------------


To the Shareholders and Board of Directors
of PEC Israel Economic Corporation:


We have audited the accompanying consolidated balance sheet of PEC Israel
Economic Corporation (a Maine corporation) and subsidiaries as of December 31,
1996, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the two 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 Affiliated
Companies of the Company, which statements reflect assets and equity in net
income of $196.2 million and $19.1 million, respectively, of the consolidated
totals as of and for the year ended December 31, 1996 and equity in net income
of $20.5 million of the consolidated total for the year ended December 31, 1995.
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.



<PAGE>

Page 2

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 PEC Israel Economic Corporation and subsidiaries as of
December 31, 1996, and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.





HAFT & GLUCKMAN LLP                     ARTHUR ANDERSEN LLP






New York, New York
March 31, 1997

<PAGE>

                   PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                             CONSOLIDATED BALANCE SHEETS
                 (IN THOUSANDS -  except share and per share amounts)

                                               DECEMBER 31,
                                           --------------------
                                             1997         1996
                                           --------    --------
ASSETS
Cash and cash equivalents (Note 2)         $  8,948    $  7,044
Investments (Notes 2 and 3)                 444,398     391,802
Assets of General Engineers
  Limited (Note 2)                            5,274       4,763
Other assets                                  2,484       4,094
                                           --------    --------
     Total assets                          $461,104    $407,703
                                           --------    --------
                                           --------    --------

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
  Liabilities of General Engineers
    Limited (Note 2)                        $ 1,767    $  1,384
  Deferred income taxes (Notes 2 and 4)      38,451      26,428
  Other liabilities                           4,761       6,015
                                           --------    --------
     Total liabilities                       44,979      33,827
                                           --------    --------

Commitments and contingencies (Notes 3 and 6)

Shareholders' equity (Notes 2 and 5):
  Common stock, $1.00 par value,
    40,000,000  shares authorized in
    1997 and in 1996, 31,952,180
    shares issued in 1997 and
    in 1996 and 18,362,188 and
    18,508,388 shares outstanding at
    1997 and 1996, respectively              31,952      31,952
  Class B preferred stock, no par value,
     544,514 shares authorized, none
     issued and outstanding                    -            -
  Additional paid-in capital                103,282     103,282
  Unrealized gain on marketable
    securities, net                           7,270       1,938
  Cumulative translation adjustment         (40,946)    (26,317)
  Retained earnings                         334,934     280,431
                                           --------    --------
                                            436,492     391,286
  Treasury stock, 13,589,992 and
   13,443,792 shares at
   1997 and 1996, respectively              (20,367)    (17,410)
                                           --------    --------
     Total shareholders' equity             416,125     373,876
                                           --------    --------
     Total liabilities and
      shareholders' equity                 $461,104    $407,703
                                           --------    --------
                                           --------    --------

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

                                          3
<PAGE>

                   PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED STATEMENTS OF INCOME
                      (IN THOUSANDS -  except per share amounts)

                                  YEARS ENDED DECEMBER 31,
                                -----------------------------
                                  1997       1996        1995
                                -------    -------    -------
REVENUES:
  Interest and dividends        $ 1,255   $    964   $  2,057
  Equity in net income of
   Affiliated Companies
   (Notes 2 and 3)               48,538     23,438     23,720
  Net gain on issuance of
   shares by Affiliated
   Companies                     10,360        849      2,282
  Revenues of General
   Engineers Limited (Notes 2
     and 3(k))                    9,738      8,635      7,197
  Net gain on sales of
   investments in Affiliated
   Companies (Note 2)             8,274      2,512      1,181
  Net gain on sales,
   and changes in market value,
   of trading securities(Note 2)  6,643      5,167      4,502
  Other                           3,822      2,970      1,126
                                -------    -------    -------
                                 88,630     44,535     42,065
                                -------    -------    -------
EXPENSES:
  General and administrative      3,237      3,037      3,154
  Cost of sales and expenses
   of General Engineers
   Limited (Note 2)               9,352      8,496      7,007
                                -------    -------    -------
                                 12,589     11,533     10,161
                                -------    -------    -------
  Income before income
   taxes and loss from
   discontinued operations       76,041     33,002     31,904

  Income taxes (Note 4)          21,538      4,789      6,282
                                -------    -------    -------
  Income before loss from
   discontinued operations       54,503     28,213     25,622
  Loss from discontinued
   operations of General
   Engineers Limited, net
   of income taxes                 -            -        (380)
                                -------    -------    -------

  Net income                    $54,503    $28,213    $25,242
                                -------    -------    -------
                                -------    -------    -------

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

                                          4
<PAGE>

                   PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED STATEMENTS OF INCOME
                      (IN THOUSANDS - except per share amounts)

                                     (continued)


                                       YEARS ENDED DECEMBER 31,
                                     --------------------------
                                      1997      1996      1995
                                     ------    ------    ------

  Earnings per common share
   before loss from discontinued
   operations - basic                $ 2.95     $ 1.51    $1.37

  Loss from discontinued
   operations of General
   Engineers Limited, net
   of income taxes - basic
   and diluted                          -          -      (0.02)
                                     ------    ------    ------

  Earnings per common share -
   basic (Note 5)                    $ 2.95    $ 1.51    $ 1.35
                                     ------    ------    ------
                                     ------    ------    ------
  Earnings per common share
   - diluted (Note 5)                $ 2.92    $ 1.49    $ 1.34
                                     ------    ------    ------
                                     ------    ------    ------






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


                                          5
<PAGE>

                   PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                   CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

                                    (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                        Unrealized
                           Common Stock     Additional   Gain on      Cumulative
                         ----------------    Paid-in    Marketable    Translation    Retained  Treasury
                         Shares    Amount    Capital    Securities    Adjustment     Earnings    Stock      Total
                         ------    ------    -------    ----------    ----------     --------    -----      -----
<S>                      <C>       <C>       <C>        <C>           <C>            <C>       <C>
Balance,
  January  1, 1995       18,758    $31,952   $ 99,613     $  2,845     $(13,114)     $233,366   $(13,194)  $341,468

Paid-in capital of
 Affiliated Companies         -          -      3,615            -            -             -          -      3,615
Change in market
 value of available-for
 -sale equity securities,
  net of tax                  -          -           -         381            -             -          -        381
Cumulative translation
 adjustment                   -          -           -           -       (7,029)            -          -     (7,029)
Retained earnings
  adjustment  (Note 5)        -          -           -           -            -        (6,390)         -     (6,390)
Net income                    -          -           -           -            -        25,242          -     25,242
                         ------    -------    --------    --------     --------      --------   --------   --------
Balance,
 December 31, 1995       18,758     31,952     103,228       3,226      (20,143)      252,218    (13,194)   357,287

Paid-in capital of
 Affiliated Companies         -          -          54           -            -             -          -         54
Change in market
 value of available-for
 -sale equity securities,
  net of tax                  -          -           -      (1,288)           -             -          -     (1,288)
Cumulative translation
 adjustment                   -          -           -           -       (6,174)            -          -     (6,174)
Purchase of treasury
 stock (Note 5)            (250)         -           -           -            -             -     (4,216)    (4,216)
Net income                    -          -           -           -            -        28,213          -     28,213
                         ------    -------    --------    --------     --------      --------   --------   --------
Balance,
 December 31, 1996       18,508     31,952     103,282       1,938      (26,317)      280,431    (17,410)   373,876

Change in market value of
 available-for-sale equity
 securities, net of tax       -          -           -       5,332            -             -          -      5,332
Cumulative translation
 adjustment                   -          -           -           -      (14,629)            -          -    (14,629)
Purchase of treasury
 stock (Note 5)            (146)         -           -           -            -             -     (2,957)    (2,957)
Net income                    -          -           -           -            -        54,503          -     54,503
                         ------    -------    --------    --------     --------      --------   --------   --------
Balance,
 December 31, 1997       18,362    $31,952    $103,282    $  7,270     $(40,946)     $334,934   $(20,367)  $416,125
                         ------    -------    --------    --------     --------      --------   --------   --------
                         ------    -------    --------    --------     --------      --------   --------   --------
</TABLE>


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

                                          6
<PAGE>

                   PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    (IN THOUSANDS)


                                         Years Ended December 31,
                                        --------------------------
                                          1997     1996     1995
                                        --------  -------  -------
Cash Flows From Operating
 Activities:
  Net income                            $ 54,503  $28,213   $25,242
  Adjustments to reconcile
   net income to net cash
   provided by operating
     activities -
     Change in market value of
      trading securities                  (2,008)  (1,506)   (3,217)
     Purchase of trading
      securities                         (18,457) (13,131)  (14,566)
     Purchase of U.S.
      Government obligations                -        -      (25,310)
     Proceeds from sale of
      trading securities                  12,906   17,602    16,435
     Proceeds from sale of U.S.
      Government obligations                -        -       25,807
     Equity in net income
      of Affiliated Companies            (48,538) (23,438)  (23,720)
     Net gain on sales of
      investments in Affiliated
      Companies                           (8,274)  (2,512)   (1,181)
     Net gain on sales of
      trading securities                  (4,635)  (3,661)   (1,285)
     Gain on investment
       in partnerships                    (2,000)    (794)      (31)
     Income of consolidated
       subsidiaries                       (1,120)  (1,124)     (665)
     Loss from discontinued
      operation, net of income
      taxes                                 -        -          380
     Amortization of premiums
      on receivables, net                   -        -           83
     Net gain on issuance
      of shares by Affiliated
      Companies                          (10,360)    (849)   (2,282)
     Dividends from
      Affiliated Companies                24,068   12,459     9,291



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

                                          7
<PAGE>

                  PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    (IN THOUSANDS)

                                     (continued)

                                         Years Ended December 31,
                                        ---------------------------
                                          1997     1996      1995
                                        -------   -------   -------

  Change in other assets and
   liabilities                          $ 2,791   $ 2,232   $ 1,653
  Provision for deferred
   income taxes                           7,944    (1,537)   (3,099)
  Write-off of deferred
   charges                                 -         -          246
                                        -------   -------   -------
         Net cash provided by
          operating activities            6,820    11,954     3,781
                                        -------   -------   -------

Cash Flows From Investing
 Activities:

  Collection of U.S.
   Government and State
   obligations                             -        3,015      -
  Purchases of notes
   receivable                            (5,284)   (4,892)  (16,295)
  Collection of capital
   notes and loans
   receivable                               412     1,349       483
  Proceeds from sales of
   equity interests                      30,462     8,687    28,833
  Return of capital                         406      -         -
  Acquisitions of equity
   interests                            (27,955)  (23,556)  (22,835)
                                        -------   -------   -------

         Net cash used in
          investing activities           (1,959)  (15,397)   (9,814)
                                        -------   -------   -------

Cash Flows From Financing
 Activities:

  Purchases of treasury stock            (2,957)   (4,216)     -
                                        -------   -------   -------

         Net cash used in financing
          activities                     (2,957)   (4,216)     -
                                        -------   -------   -------

Net increase (decrease) in cash
 and cash equivalents                     1,904    (7,659)   (6,033)

Cash and cash equivalents,
 beginning of year                        7,044    14,703    20,736
                                        -------   -------   -------

Cash and cash equivalents,
 end of year                            $ 8,948   $ 7,044   $14,703
                                        -------   -------   -------
                                        -------   -------   -------

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



                                          8
<PAGE>

                   PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    (IN THOUSANDS)

                                     (continued)

                                         Years Ended December 31,
                                        ---------------------------
                                          1997     1996      1995
                                        -------   -------   -------

Supplemental Disclosure of
  Cash Flow Information:
    Cash paid during the
     year for income taxes              $ 12,231  $ 5,905   $ 8,830












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


                                          9
<PAGE>

                   PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   THE COMPANY

PEC Israel Economic Corporation and subsidiaries ("PEC" or the "Company")
organizes, acquires equity interests in, finances and participates in the
management of companies, predominantly companies which are located in the
State of Israel or are Israel-related.  The Company is a subsidiary of IDB
Development Corporation Ltd. ("IDB Development").  Discount Investment
Corporation Ltd. ("Discount Investment") is also a subsidiary of IDB
Development.  IDB Development is a subsidiary of IDB Holding Corporation Ltd.
("IDB Holding").  All of these companies are hereinafter referred to as the
"IDB Group".  As of December 31, 1997, IDB Development owned approximately
71.9% of the Company's outstanding common stock.  For additional information,
see Note 9.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INVESTMENTS

The Company accounts for substantially all of its investments on the equity
method.  Under the equity method, the Company records its proportionate share of
profits and losses and capital transactions based on its percentage of direct
and indirect interests in earnings of companies 20% to 50% owned and in
companies less than 20% owned in which the Company, together with other
corporations in the IDB Group, has the ability to exercise significant
influence.  These investees are collectively referred to as "Affiliated
Companies".

The excess of cost over net assets acquired and the excess of net assets
acquired over cost, to the extent not otherwise applied, are amortized primarily
over a ten-year period.  Gains and losses on issuances of shares by Affiliated
Companies are recognized in the accompanying consolidated statements of income.

The Company consolidates its wholly-owned subsidiaries.  All material
intercompany transactions and balances have been eliminated in consolidation.
General Engineers Limited, a wholly-owned Israeli subsidiary of the Company,
sells various types of equipment in Israel, especially power generation
equipment.  Its assets, liabilities, and results of operations are grouped
and presented separately in the accompanying consolidated financial
statements.

All investments in which the Company owns less than 20% that are not accounted
for on the equity method and are not marketable securities, are accounted for
using the cost method.

The Company accounts for its investments in marketable securities in accordance
with Statement of Financial Accounting Standards No. 115 "Accounting For Certain
Investments in Debt and Equity Securities" ("FAS 115").  Under FAS 115,
marketable debt and equity securities, other than equity securities accounted
for under the equity method, are reported at fair value, with unrealized gains
and losses from those securities which are classified as "trading securities"
included in net income and unrealized gains and losses from those securities
which are classified as "available-for-sale securities" reported as a separate
component of shareholders' equity.  Debt securities classified as "held to
maturity" are reported at amortized cost.


                                          10
<PAGE>

                   PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - cont'd

FOREIGN CURRENCY TRANSLATIONS

Two foreign subsidiaries and several Affiliated Companies prepare their primary
financial statements in their local currency, the New Israel Shekel ("NIS"), in
accordance with generally accepted accounting principles in Israel, which
require financial statements to be adjusted for the effects of inflation in
Israel.  For purposes of the Company's financial statements, these subsidiaries
and Affiliated Companies provide financial information, which is denominated in
NIS, prepared in accordance with generally accepted accounting principles in the
United States.

Subsidiaries and Affiliated Companies whose functional currency is NIS translate
their financial information to the U.S. dollar based on exchange rates at
year-end for assets and liabilities and at average exchange rates for revenues
and expenses.  Translation differences are reflected as a component of
shareholders' equity under the caption "Cumulative translation adjustment".
Upon disposition of an investment, the related cumulative translation adjustment
balance  is recognized in determining income or loss.  If the NIS is devalued
against the dollar in the future, such cumulative translation adjustments are
likely to result in additional reductions of shareholders' equity.

Affiliated Companies whose functional currency is the U.S. dollar translate
their assets and liabilities that are denominated in foreign currency using
year-end exchange rates, except for property and equipment, inventory and
certain investment and equity accounts which are translated using exchange rates
prevailing on the dates of acquisition.  Revenues and expenses that are
denominated in foreign currency are translated primarily at the exchange rates
in effect at the time of the relevant transactions and partially at average
rates of exchange during the year.  Revenue and expense items relating to assets
translated at historical rates are translated on the same basis as the related
asset.  Translation differences are included in the determination of income for
the year.



                                          11
<PAGE>

                   PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - cont'd

PROVISION FOR INCOME TAXES

Income taxes are provided using the liability method in accordance with
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes".  Under this method, deferred tax assets and liabilities are recognized
based on differences between financial statement and income tax bases of assets
and liabilities using presently enacted tax rates.

CASH EQUIVALENTS

The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.

USE OF ESTIMATES

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

RECLASSIFICATION

Certain reclassifications have been made to the prior year consolidated
financial statements to conform with the 1997 presentation.









                                          12
<PAGE>

                   PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3.   INVESTMENTS

Certain information about the Company's investments follows
(in thousands):

                                               December 31,
                             ---------------------------------------------
                                      1997                    1996
                             ---------------------   ---------------------
                             Percentage   Carrying   Percentage   Carrying
                               Owned        Value       Owned       Value
                             ----------   --------   ----------   --------
Affiliated Companies:
Property and Building
     Corporation Ltd.
     (a)(i)                     39%     $ 71,398         38%     $ 65,669
Tambour Ltd.(b)(i)              43        54,922         43        61,322
Super-Sol Ltd.(c)(i)            13        47,501         18        44,300
Scitex Corporation Ltd.
     (d)(i)                      7        34,759          7        34,994
Elron Electronic
     Industries Ltd.
     (f)(i)                     14        33,583         14        32,670
El-Yam Ships Ltd. (f)
     See Note 6(i)              10        29,190         10        26,644
Cellcom Israel Ltd. (e)         13        23,628         13        11,304
Caniel-Israel Can
     Company Ltd.(f)(i)         29        14,295         29        15,768
Klil Industries Ltd.
     (f)(i)                     17        11,346         17        12,205

DIC and PEC Cable TV Ltd.(f)
      See Note 6(e)             49         9,302         49         6,998
Mul-T-Lock Ltd.(f)(i)           15         7,660         17         7,510
Gilat Satellite Networks
     Ltd. (f)(i)                 7         7,497          7         6,361
Renaissance Fund LDC             4         5,217          4         5,225
Gemini Israel Fund L.P.         11         4,346         11         2,971
Tefron Ltd. (f)(g)(i)            7         4,321         13         1,849
Liraz Systems Ltd. (f)(i)       16         3,294         16         3,114
Gilat Communications Ltd.(f)(i) 10         2,590         12         1,094
Maxima Air Separation
     Center Ltd. (f)(i)         12         2,258         12         2,267
Tel-Ad Jerusalem Studios
     Ltd. (f) See Note 6(f)     12         1,810         12         1,564
"Delek" The Israel Fuel
     Corp. Ltd. (f)(i)           -          -             3         7,362
Other  (f)(i)                    -         7,727          -        11,706
                                        --------                 --------
                                        $376,644                 $362,897
                                        --------                 --------


                                          13
<PAGE>

                    PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INVESTMENTS - cont'd
                                           December 31,
                                  ---------------------------
                                    1997               1996
                                  ---------          --------
                                   Carrying          Carrying
                                    Value              Value
                                  ---------          --------
  Investments at cost             $  15,313          $  2,854
  Investments in marketable
   securities                        52,441            25,653
  State obligations and
   Government of Israel Bonds         -                   398
                                  ---------          --------

                                     67,754            28,905
                                  ---------          --------

               Total              $ 444,398          $391,802
                                  ---------          --------
                                  ---------          --------

  Information about certain Affiliated Companies follows:

  (a)     Property and Building Corporation Ltd. ("Property and Building") is
          one of the largest real estate holding and development companies in
          Israel. Summarized financial information for Property and Building
          follows (in thousands):

                                                 December 31,
                                        ------------------------------
                                            1997       1996      1995
                                        ------------------------------
      Current assets*                   $  99,005  $ 72,518   $ 42,543
      Total assets                        447,954   399,880    303,980
      Current liabilities                  53,342    55,753     42,543
      Long-term liabilities               156,991   116,292     69,253
      Minority interest                    60,048    56,794     54,097
      Shareholders' equity                175,123   168,376    133,182
      Income                              125,899   111,800     99,283
      Earnings before taxes on
          income                           40,066    40,136     39,106
      Net earnings                         24,535    24,309     19,907

     * Including building
       projects and inventories
       of apartments                       30,091    21,075     8,797



                                          14
<PAGE>

                    PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INVESTMENTS - cont'd

          In May 1996, Property and Building raised approximately $25 million of
          capital through a rights offering in Israel to its shareholders to
          purchase ordinary shares of Property and Building.  The Company
          exercised the rights offered to it for $8.2 million and purchased
          additional ordinary shares in the open market for $1.5 million,
          slightly increasing the Company's ownership interest to 38% at a total
          cost of $9.7 million.

          The Company's equity in net income of Property and Building was $9.1
          million for 1996, of which $4.9 million was recognized in the fourth
          quarter as Property and Building recognizes revenue under the
          completed contract method of accounting.

          During 1997, the company purchased an additional 1.0% of Property and
          Building for $3.3 million.  For additional information,see Note 9.

     (b)  Tambour Ltd. ("Tambour") is Israel's largest paint manufacturer.
          Summarized financial information for Tambour follows (in thousands):

                                                 December 31,
                                        ------------------------------
                                            1997       1996      1995
                                        ------------------------------
          Current assets                $118,727   $121,471   $121,217
          Total assets                   173,658    184,867    167,019
          Current liabilities             32,966     29,895     21,916
          Long term liabilities            3,264      2,621      1,485
          Minority interest                9,489      9,509      5,509
          Shareholders' equity           127,940    142,840    138,110
          Revenue from sales             179,209    189,028    160,317
          Gross profit                    66,206     65,914     56,427
          Income before taxes
           on income                      20,548     30,843     27,252
          Net income from
           continuing operations          15,073     21,531     19,984
          Net income                      16,756     22,702     20,018



                                          15
<PAGE>

                    PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INVESTMENTS - cont'd

     (c)  Super-Sol Ltd. ("Super-Sol") operates Israel's largest chain of
          supermarkets in terms of revenues.  Summarized financial information
          for Super-Sol follows (in thousands):

                                                 December 31,
                                        ------------------------------
                                            1997       1996*     1995
                                        ------------------------------
           Current assets               $ 309,202  $ 234,803  $205,971
           Total assets                   674,510    490,021   392,852
           Current liabilities            218,782    220,715   159,910
           Long-term liabilities          104,646      7,154     6,525
           Shareholders' equity           351,082    248,808   224,023
           Revenues                     1,291,358  1,027,474   834,836
           Earnings before taxes           54,895     57,735    53,602
           Net earnings                    39,172     43,837    36,216

           * Restated

          In October 1997, Super-Sol raised approximately $90 million of capital
          through the sale of American Depositary Shares representing ordinary
          shares of Super-Sol in a public offering in the United States in
          which the Company realized a net gain of $4.4 million.  During 1997,
          the Company sold 1.4% of Super-Sol and realized a net gain of $2.8
          million.  As a result of the offering and the Company's sales, the
          Company's ownership interest in Super-Sol was reduced to approximately
          13.5%. For additional information, see Note 9.

     (d)  Scitex Corporation Ltd. ("Scitex") is a world leader in  visual
          information communication for the digital preprint, digital printing
          and digital video markets. Summarized financial information for Scitex
          follows (in thousands):

                                                 December 31,
                                        ------------------------------
                                            1997       1996      1995
                                        ------------------------------
          Current assets                $488,992   $523,587   $703,030
          Total assets                   668,727    704,734    920,831
          Current liabilities            167,711    203,511    224,991
          Long-term liabilities              907        496        424
          Shareholders' equity           500,109    500,727    700,981
          Revenues                       675,677    695,048    728,900
          Gross profit                   262,753    231,101    308,273
          Income (loss) before
            taxes on income                4,823   (180,132)   (46,852)
          Net income (loss)                  582   (178,279)   (34,511)


                                          16
<PAGE>

                    PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INVESTMENTS - cont'd

          Scitex recognized  net income of $0.6 million for 1997, compared
          with a net loss of $178.3 million for 1996, of which $110 million
          was attributable to restructuring and other charges, and a net
          loss of $34.5 million for 1995, all of which was attributable to
          special charges.

     (e)  Cellcom Israel Ltd. ("Cellcom") operates Israel's second cellular
          telephone system.  Summarized financial information for Cellcom
          follows (in thousands):

                                            December 31,
                                   ------------------------------
                                       1997       1996      1995
                                   ------------------------------

          Current assets           $ 142,252  $ 93,666   $ 44,993
          Total assets               614,873   419,028    240,783
          Current liabilities        225,286   316,938    133,700
          Long-term liabilities      426,056*  222,033*   188,339*
          Shareholders' deficit      (36,469) (119,947)   (81,256)
          Income from sales and
           services                  612,945   304,072    130,232
          Gross profit               252,847    85,692      3,466
          Profit (loss) before
           taxes on income            57,609   (42,387)   (70,247)
          Net profit (loss)           75,691   (42,387)   (70,247)

          *Includes loans from the Company of approximately $27 million,
          $25 million and $21 million for 1997, 1996 and 1995,
          respectively.

          Certain of Cellcom's current and long-term liabilities at
          December 31, 1997, aggregating $118 million and $202 million,
          respectively, are secured by pledges of all of Cellcom's assets.

          In October 1997, a Cellcom subscriber filed a motion with the
          District Court in Jerusalem, Israel that the court approve a
          lawsuit filed with the motion as a class action on behalf of
          Cellcom's subscribers under Israel's Consumer Protection Law against
          Cellcom for damages of approximately $44 million because of
          Cellcom's alleged misrepresentation of the manner in which it
          calculates air time charges and the way it rounds off time for
          telephone calls.  Cellcom has denied the plaintiff's allegations
          and stated that it will vigorously oppose the lawsuit. Relying
          upon the advice of its legal counsel, Cellcom's management
          believes that Cellcom has valid defenses to the recognition of
          the lawsuit as a class action.  At this early stage, it is
          impossible for Cellcom's management and its legal counsel to
          estimate the effects of the lawsuit on Cellcom if it is
          recognized as a class action.



                                          17
<PAGE>

                    PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INVESTMENTS - cont'd

     (f)  The following summarized financial information represents an
          aggregation of the Company's percentage interests in the Affiliated
          Companies for which summarized financial information is not provided
          above (in thousands):

                                                 December 31,
                                        ------------------------------
                                            1997       1996      1995
                                        ------------------------------

          Current assets                $ 51,140   $ 66,626   $ 56,200
          Total assets                   150,752    168,068    161,733
          Long-term debt                  16,095     16,777     12,937
          Shareholders' equity           114,475    117,723    126,250
          Revenue                         83,021    130,410     93,939
          Net income                      15,833     15,276     11,865

     (g)  Significant capital transactions during the three years  ended
          December 31, 1997 that are not otherwise discussed in Note 3
          are as follows:

          In September 1997, Tefron Ltd. ("Tefron") raised approximately $53
          million of capital through the sale of its ordinary shares in an
          initial public offering in the United States in which the Company also
          sold ordinary shares of Tefron.  As a result of the sales, the Company
          realized a gain on issuance of shares by Tefron of approximately $4.9
          million and a gain on sales of investments of approximately $4.1
          million.  As a result of the sales, the Company's ownership interest
          in Tefron was reduced from 13% to 7.1%.

          In October 1995, Gilat Satellite Network Ltd. ("Gilat Satellite") sold
          ordinary shares in a secondary public offering in the United States in
          which the Company also sold ordinary shares of Gilat Satellite.  As a
          result of the sales, the Company realized a gain on issuance of shares
          by Gilat Satellite  of approximately $2.3 million and a gain on sales
          of investments of approximately $1.1 million.  As a result of these
          sales, the Company's ownership interest in Gilat Satellite  was
          reduced from 10% to 7%.

     (h)  The Company's equity in the net income of Affiliated Companies by
          major lines of business was as follows (in thousands):

                                                 December 31,
                                        ------------------------------
                                            1997       1996      1995
                                        ------------------------------
          Telecommunications and
            technology                  $19,073    $(10,193)  $(4,254)
          Industry                       12,273      14,638    12,284
          Real Estate                     8,972       9,119     6,246
          Retail, shipping and other      8,220       9,874     9,444
                                        -------    --------   -------
                                        $48,538    $ 23,438   $23,720
                                        -------    --------   -------
                                        -------    --------   -------


                                          18
<PAGE>

                    PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INVESTMENTS - cont'd

     (i)  Certain of the Affiliated Companies are publicly traded and their
          shares are quoted on the Tel Aviv Stock Exchange and/or U.S.
          exchanges.  The aggregate market values of the shares owned by the
          Company, based on the closing sale price on the principal market on
          which such shares are traded, were approximately $451 million and $347
          million and their carrying values were approximately $314 million and
          $300  million at December 31, 1997 and 1996, respectively.

     (j)  On July 25, 1995, the Company sold to Israel Discount Bank of New York
          ("IDBNY") all of the Company's nonvoting preferred shares of IDBNY for
          approximately $27 million, a price that equaled PEC's carrying value
          of those shares.  While the sale did not result in a gain for
          financial statement purposes, PEC did realize a gain for tax purposes,
          for which PEC provided approximately $3 million of additional income
          taxes during 1995.

     (k)  During the second quarter of 1995, General Engineers Limited (i)
          entered into an agreement with a majority owned subsidiary of Discount
          Investment for that company to distribute household appliances made by
          manufacturers represented by General Engineers Limited and (ii) sold
          its service and repair business for household appliances to an
          unrelated party.  As a result of these transactions, the Company has
          restated its results of operations for the year ended December 31,
          1995 to reflect these discontinued operations of General Engineers
          Limited.

4.  INCOME TAXES

     The U.S. and Foreign components of income before income taxes are as
     follows (in thousands):

                                                 December 31,
                                        ------------------------------
                                          1997        1996      1995
                                        -------    -------    -------

     U.S.                               $ 5,491    $ 3,229    $ 5,364
     Foreign                             70,550     29,773     26,540
                                        -------    -------    -------
                                        $76,041    $33,002    $31,904
                                        -------    -------    -------
                                        -------    -------    -------

     Income tax expense is comprised of the following components
     (in thousands):

                                                 December 31,
                                        ------------------------------
                                          1997        1996      1995
                                        -------    -------    -------
      Current:
        U.S.                            $ 9,161    $ 3,790    $ 7,298
        Foreign                           4,433      2,536      2,083
      Deferred                            7,944     (1,537)    (3,099)
                                        -------    -------    -------
                                        $21,538    $ 4,789    $ 6,282
                                        -------    -------    -------
                                        -------    -------    -------

                                          19
<PAGE>

                    PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     INCOME TAXES - cont'd

     Deferred income tax expense principally represents temporary differences
     related to equity in net income of, and gain on issuances of shares by,
     Affiliated Companies and to changes in the market value of marketable
     securities.

     A reconciliation of income tax expense as reflected in the accompanying
     statements with the statutory U.S. Federal income tax rate is as follows
     (in thousands):

                                                 December 31,
                                        ------------------------------
                                          1997        1996      1995
                                        -------    -------    -------
     U.S. income taxes at statutory
       rate of 35%                      $26,614    $11,551    $11,166
     Excess of taxes at statutory
          rate over taxes provided
          on equity in net income
          of, and net gain on
       issuance of shares by,
       Affiliated Companies              (5,173)    (6,805)    (4,781)
     Other                                   97         43       (103)

                                        -------    -------    -------
                                        $21,538    $ 4,789    $ 6,282
                                        -------    -------    -------
                                        -------    -------    -------

     Assets (liabilities) for deferred income taxes are as follows:

                                             December 31,
                                        ---------------------
                                            1997       1996
                                        --------   --------
         Foreign tax credit
          carryforwards                 $  6,780   $  7,506
         Valuation allowance              (6,780)    (7,506)
         Gross deferred tax
          liabilities                    (38,451)   (26,428)
                                        --------   --------
         Deferred income taxes          $(38,451)  $(26,428)
                                        --------   --------
                                        --------   --------

     Deferred income taxes of approximately $8.3 million have not been accrued
     on the Company's temporary differences, totaling approximately $34.6
     million, related to its investments in Affiliated Companies which are more
     than 50% owned by the IDB Group or in which the IDB Group otherwise has
     effective control and for which such amounts are currently expected to be
     permanently reinvested (the "Majority-Owned Affiliated Companies").

     Deferred income taxes relate to temporary differences with respect to
     the Company's share of undistributed earnings of, and gains on issuances of
     shares by, Affiliated Companies that are not the Majority-Owned Affiliated
     Companies and changes in the market value of marketable securities.

     At December 31, 1997, the Company had approximately $6.8 million of foreign
     tax credits that expire through 2002.  Because the utilization of these
     foreign tax credits is considered unlikely, the Company has provided
     a full valuation allowance.

     The Company's foreign subsidiaries and the Affiliated Companies file
     separate tax returns and provide for taxes accordingly.

                                          20
<PAGE>

                    PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.  SHAREHOLDERS' EQUITY

     In July 1996, the Company announced that it would purchase from time to
     time up to 500,000 shares of its common stock in the open market at its
     discretion, taking into account such factors as price and prevailing market
     conditions.  During 1997 and 1996, the Company purchased 146,200 shares and
     250,200 shares of its common stock for $3.0 million and $4.2 million,
     respectively.

     In December 1995, the Company purchased from IDB Development a 6.5% equity
     interest in Property and Building, based on the market price of Property
     and Building's shares on the Tel Aviv Stock Exchange on the purchase date.
     Since this transaction was between related parties, the Company recorded in
     its financial statements the carrying value of such equity interest on IDB
     Development's financial statements and the Company reduced its retained
     earnings by approximately $6.7 million, the difference between the amount
     the Company paid for such equity interest ($15.5 million) and IDB
     Development's carrying value of such equity interest ($8.8 million).

     EARNINGS PER COMMON SHARE

     In 1997, the Company adopted Statement of Financial Accounting Standards
     No. 128, EARNINGS PER SHARE, ("FAS 128") which requires the presentation of
     basic earnings per share and, for all entities with complex capital
     structures, diluted earnings per share.  Certain of the Company's
     Affiliated Companies have issued equity instruments which may be converted
     into potential common stock ("PCEs") that, if converted, would have a
     dilutive effect on the Company's equity in net income of such Affiliated
     Companies.  FAS 128 requires that earnings per common share information for
     the years ended December 31, 1996 and 1995 be restated to present diluted
     earnings per common share.  Diluted earnings per common share for 1996 and
     1995 are $0.02 and $0.01 per share, respectively, less than previously
     reported earnings per common share.  The following is a reconciliation of
     the net income used in the computation of basic earnings per share to net
     income assuming conversion of the PCEs (in thousands):

                                        For the Year Ended December 31,
                                        -------------------------------
                                          1997       1996       1995
                                        --------   --------   --------
          Income from
           continuing operations
            -basic                       $54,503    $28,213    $25,622
          Loss from
           discontinued operations          --        --          (380)
                                        --------   --------   --------

          Net income available to common
           shareholders - basic           54,503     28,213     25,242

          Effect of dilutive securities:
           Dilutive effect of PCEs
           issued by certain Affiliated
           Companies                        (563)      (272)      (106)
                                        --------   --------   --------
          Net income available to common
           shareholders-diluted         $ 53,940   $ 27,941   $ 25,136
                                        --------   --------   --------
                                        --------   --------   --------


                                          21
<PAGE>

                    PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SHAREHOLDERS' EQUITY - cont'd

     Basic and diluted earnings per share are computed using the weighted
     average number of common shares outstanding during the year which were
     18,471,838, 18,714,113, and 18,758,588 for 1997, 1996 and 1995,
     respectively.  Weighted average number of common shares used in the
     computation of basic and diluted earnings per share is not affected by the
     assumed exercise of the PCEs issued by the Affiliated Companies and is
     therefore the same for both calculations.

6.   COMMITMENTS AND CONTINGENCIES

     (a)  The Company has agreed to contribute up to $9.0 million over a 10 year
          period ending in 2003 to DEP Technology Holdings Ltd. ("DEP") of which
          the Company had contributed $6.3 million as of December 31, 1997
          through the purchase of capital notes of DEP.  In January 1998, the
          Company contributed approximately $667,000 to DEP through the purchase
          of additional equity.

     (b)  General Engineers Limited has a $2 million credit agreement with a
          bank.  The Company has agreed with the bank that General Engineers
          Limited will remain a subsidiary of the Company as long as the credit
          agreement is in effect.

     (c)  The Company has contracted with IDB Development for it to give certain
          advisory services to the Company in Israel, including advice as to
          financial, economic, accountancy, legal and tax matters, for an annual
          fee of $130,000.  During each of 1997, 1996 and 1995, the Company
          incurred expenses of $130,000 for these services.

     (d)  The Company and a wholly-owned subsidiary of Discount Investment are
          parties to an agreement under which, among other things, each party
          provides services to the other party and offers the other party equal
          participation in new business opportunities.  In consideration for
          such services and offers, each party pays the other a fee of 2 1/2% of
          the equity or long-term debt invested by such paying party in business
          opportunities initiated or initially presented by the other party.  In
          1997, 1996 and 1995, the Company incurred fees of $501,292, $133,750
          and $34,610 under this agreement, respectively.

     (e)  Tevel Israel International Communications Ltd. ("Tevel"), which is
          held 48.4% by DIC and PEC Cable TV Ltd., was awarded cable television
          franchises in Israel in 1988.  Under the terms of the franchises,
          the Company and Discount Investment are jointly committed to arrange
          for 51% of the financing required by Tevel to perform its franchise
          obligations.  The Company has not arranged any financing for Tevel
          since October 1992 and does not presently anticipate being required to
          arrange any such financing in the near future.

     (f)  Tel-Ad Jerusalem Studios Ltd. ("Tel-Ad") is one of the three companies
          awarded a franchise in 1993 by Israel's Second Authority


                                          22
<PAGE>

                    PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMITMENTS AND CONTINGENCIES - cont'd

          for Television and Radio to operate Israel's second television
          station.  The Company is obligated to provide up to $4 million of
          the financing required by Tel-Ad to fulfill its obligations under
          the franchise.

     (g)  In connection with the Company's investments in Gemini Israel II
          Limited Partnership ("Gemini II"), a venture capital limited
          partnership, the Company may be required to make capital contributions
          of up to $1.5 million to Gemini II.  In 1997, the Company had
          contributed approximately $300,000 and an additional $150,000 was
          contributed to Gemini II in March 1998.

     (h)  The Company has agreed to contribute up to $4.2 million over a four
          year period ending in 2001 to Soreq Development Center (S.D.C.) Ltd.
          ("Soreq"), a developer of non-military commercial applications of
          nuclear technologies of Israel's Ministry of Defense.  As of
          December 31, 1997, the Company contributed approximately $1.3 million
          and an additional $200,000 was contributed to Soreq in January 1998.


     (i)  El-Yam Financial Holding (Hamigdal) Ltd. ("Hamigdal"), a corporation
          in which the Company owns a 10.1% interest and accounts for on the
          equity method, was named among the defendants in an action instituted
          in the Tel-Aviv District Court in Israel on August 5, 1997 against
          Discount Investment and 19 other defendants.  The defendants also
          include IDB Holding.  The plaintiff in the action alleges, among
          other things, that IDB Holding and Hamigdal (the owner of
          approximately 37.1% of IDB Holding), as indirect controlling
          shareholders of Discount Investment, breached various obligations
          under law allegedly applying to them, including provisions relating to
          fiduciary duty and norms of conduct of controlling shareholders, in
          connection with Discount Investment's sale on August 3, 1997 of all of
          Discount Investment's shares in Is. H. Ltd. (which is the controlling
          shareholder of Iscar Ltd.), Blades Technology International Inc. and
          Blades Technology Ltd. for total consideration valued at approximately
          $244 million.  The plaintiff requested that the action be approved as
          a class action for all of Discount Investment's shareholders other
          than IDB Development, and that the court award all of the class
          members damages from the defendants of at least $142 million or,
          alternatively, (i) order the defendants other than Discount Investment
          to pay to Discount Investment damages of at least $471 million or (ii)
          cancel the sales.  Hamigdal, IDB Holding and Discount Investment have
          each denied the allegations against it and each intends to vigorously
          defend itself.  On March 25, 1998, the Tel Aviv District Court
          dismissed the plaintiff's motion to have the action approved as a
          class action. The plaintiff has until the middle of May 1998 to appeal
          the Court's dismissal. At this time, the Company is unable to
          determine what effect, if any, the action will have on its financial
          position and results of operations.


                                          23
<PAGE>

                    PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMITMENTS AND CONTINGENCIES - cont'd

     (j)  Certain directors of IDB Holding and/or its affiliates are also
          directors of the Company.

     (k)  In the ordinary course of the Company's business, the Company has
          entered into shareholder arrangements with Discount Investment and
          other shareholders of Affiliated Companies with respect to the
          voting and transfer of the Company's shares in such Affiliated
          Companies.

     (l)  Lawsuits have been filed against some of the Company's affiliates
          in the ordinary course of their businesses.  Management of these
          affiliates believe that the results of these lawsuits would not
          have a material effect on such affiliates' financial statements.
          Accordingly, management of the Company believes that the results
          of these lawsuits would not have a material effect on the
          Company's financial statements.

7.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     Statement of Financial Accounting Standards No. 107 ("FAS 107")
     DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires
     entities to disclose information about the estimated fair values of their
     financial instruments. FAS 107 does not apply to investments accounted for
     under the equity method (See Notes 2 and 3).

     Cash equivalents and non-marketable investments not accounted for on the
     equity method are reflected at cost, which approximates their fair values.

     The commitments described in Note 6 are generally for the near term, and,
     accordingly, their contract value is considered their fair value.

8.   NEW ACCOUNTING PRONOUNCEMENT

     In June 1997, the Financial Accounting Standards Board issued Statement of
     Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME
     ("FAS 130"), which establishes standards for reporting the components of
     comprehensive income.  The Company will adopt FAS 130 in fiscal 1998.  The
     adoption of FAS 130 will affect financial statement disclosure and
     presentation but will have no impact on the Company's consolidated
     financial position, results of operations or liquidity.

9.   SUBSEQUENT EVENTS

     In January and February 1998, the Company purchased 2.4% of Property and
     Building for $7.8 million, increasing its ownership interest in Property
     and Building to 41.2%.

     In February 1998, the Company purchased an additional 4.1% equity interest
     in Super-Sol for approximately $29.9 million, increasing the Company's
     ownership interest in Super-Sol to 17.6%.  In connection with such
     purchase, the Company borrowed $19.9 million from Israel Discount Bank Ltd.
     pursuant to a $26 million line of credit agreement.  The line of credit
     agreement is unsecured and provides that the outstanding loan balance bears
     interest at the rate of 0.5% over the one week London Interbank Offered
     Rate ("LIBOR") per annum and is payable on demand.  The line of credit
     agreement expires on April 30, 1998.

     On March 25, 1998, IDB Develpment purchased an additional 9.45% of the
     Company's outstanding common stock, increasing its ownership interest in
     the Company to 81.35%.


                                          24
<PAGE>

                    PEC ISRAEL ECONOMIC CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. QUARTERLY RESULTS OF OPERATIONS - (UNAUDITED)
    (in thousands, except per share data)

                                              Quarter Ended
                         -----------------------------------------------------
     1997                March 31       June 30      September 30  December 31
     ----                --------       -------      ------------  -----------

 Revenues                $20,002        $19,675        $33,438        $15,515
                         -------        -------        -------        -------
                         -------        -------        -------        -------

 Net income              $12,973        $12,526        $22,600        $ 6,404
                         -------        -------        -------        -------
                         -------        -------        -------        -------

 Earnings per
   common share-basic    $  0.70        $  0.68        $  1.22        $  0.35
                         -------        -------        -------        -------
                         -------        -------        -------        -------

 Earnings per common
     share-diluted       $  0.69        $  0.67        $  1.21        $  0.35
                         -------        -------        -------        -------
                         -------        -------        -------        -------


                                              Quarter Ended
                         -----------------------------------------------------
     1996                March 31       June 30      September 30  December 31
     ----                --------       -------      ------------  -----------

 Revenues                $15,551        $14,281        $ 2,088        $12,615
                         -------        -------        -------        -------
                         -------        -------        -------        -------

 Net income              $10,391        $ 8,485        $ 1,032        $ 8,305
                         -------        -------        -------        -------
                         -------        -------        -------        -------

 Earnings per
   common share
     - basic             $  0.55        $  0.45        $  0.06        $  0.45
                         -------        -------        -------        -------
                         -------        -------        -------        -------

 Earnings per
  common share
  - diluted              $  0.54        $  0.45        $  0.06        $  0.44
                         -------        -------        -------        -------
                         -------        -------        -------        -------


                                          25
<PAGE>

                                    PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

            See Item 13 Below. Information with respect to executive officers of
the Company is included at the end of part I above.

Item 11. EXECUTIVE COMPENSATION

            See Item 13 Below.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

            See Item 13 Below.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

            The information called for under Items 10, 11, 12 and 13 is
incorporated by reference from the definitive proxy statement to be filed by the
Company in connection with its 1998 Annual Meeting of Shareholders.


                                      III-1
<PAGE>

                                     PART IV

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

(a)(1)      The following financial statements of PEC Israel Economic
            Corporation are filed in response to Item 8:

            Report of Independent Public Accountants.

            Consolidated Balance Sheets at December 31, 1997 and 1996.

            Consolidated Statements of Income for the years ended December 31,
            1997, 1996 and 1995.

            Consolidated Statements of Shareholders' Equity for the years ended
            December 31, 1997, 1996 and 1995.

            Consolidated Statements of Cash Flows for the years ended December
            31, 1997, 1996 and 1995.

            Notes to Consolidated Financial Statements.

(a)(2)(a)   Financial statement schedules filed in response to Item 14(d)
            pursuant to Rule 3-09 of Regulation S-X:

            Property and Building Corporation Limited and
            Subsidiaries:

                  Auditors' Report.

                  Balance Sheets as at December 31, 1997 and 1996.

                  Statements of Earnings for the years ended December 31, 1997,
                  1996 and 1995.

                  Statement of Shareholders' Equity for the years ended December
                  31, 1997, 1996 and 1995.

                  Statements of Cash Flows for the years ended December 31,
                  1997, 1996 and 1995.

                  Notes to the Financial Statements.

(a)(2)(b)   Financial statement schedules filed in response to Item 14(d)
            pursuant to Rule 3-09 of Regulation S-X:

            Tambour Limited and Subsidiaries:

                  Auditors' Report.

                  Consolidated Balance Sheets as at December 31, 1997 and 1996.


                                      IV-1

<PAGE>

                  Consolidated Statements of Income for the years ended December
                  31, 1997, 1996 and 1995.

                  Statement of Changes in Shareholders' Equity for the years
                  ended December 31, 1997, 1996 and 1995.

                  Consolidated Statements of Cash Flows for the years ended
                  December 31, 1997, 1996 and 1995.

                  Balance Sheets as at December 31, 1997 and 1996.

                  Statements of Income for the years ended December 31, 1997,
                  1996 and 1995.

                  Statements of Cash Flows for the years ended December 31,
                  1997, 1996 and 1995.

                  Notes to the Financial Statements.

(a)(2)(c)   Reports of certified public accountants with respect to the
            financial statements of the following entities filed pursuant to
            Rule 2-05 of Regulation S-X:

                  For the year ended December 31, 1997:

                  Bayside Land Corporation Ltd. (report appears
                    after the financial statements of Property
                    and Building Corporation Ltd.)
                  Caniel-Israel Can Company Ltd.
                  Elron Electronic Industries Ltd.
                  General Engineers Ltd.
                  Gilat Communications Ltd.
                  Gilat Satellite Networks Ltd.
                  Klil Industries Ltd.
                  Liraz Systems Ltd.
                  Level 8 Systems, Inc.
                  LOGAL Educational Software and Systems Ltd.
                  Mul-T-Lock Ltd.
                  Naveh Building and Development Limited (report
                    appears after the financial statements of
                    Property and Building Corporation Ltd.)
                  PEC Israel Finance Corporation Ltd.
                  Renaissance Fund LDC
                  Scitex Corporation Ltd.


                                      IV-2

<PAGE>

                  Tefron Ltd.
                  Tel-Ad Jerusalem Studios Ltd.

                  For the year ended December 31, 1996:

                  Cellcom Israel Ltd.
                  DIC and PEC Cable TV Ltd.
                  Gemini Capital Fund Management Ltd.
                  Gemini Israel Fund L.P.
                  Ispah Holdings Limited
                  Maxima Air Separation Center Ltd.
                  Property and Building Corporation Ltd.
                  Super-Sol Ltd.
                  Tambour Ltd.

(a)(2)(d)   Schedules of PEC Israel Economic Corporation have been omitted since
            they are not applicable or the required information is shown in the
            financial statements or notes thereto.

(a)(3)      The following exhibits are included in response to Item 14(c):

   (3)(i).  Composite Articles of Incorporation of the Company, as amended,
            filed as Exhibit 3(i) to the Company's Annual Report on Form 10-K
            for the fiscal year ended December 31, 1993 and incorporated herein
            by reference.

   (3)(ii). Composite By-Laws of the Company, as amended.

10(i)(a).   Voting Agreement dated December 10, 1980 between the Company and
            Discount Investment Corporation Ltd. (formerly Discount Bank
            Investment Corporation Ltd.), as amended by a Letter Agreement dated
            May 4, 1983 and by an Addendum dated December 30, 1983, filed as
            Exhibit 10(i)(a) to the Company's Annual Report on Form 10-K for the
            fiscal year ended December 31, 1993 and incorporated herein by
            reference.

10(i)(b).   Addendum to Exhibit 10(i)(a) dated December 7, 1995, filed as
            Exhibit 10(b)(i) to the Company's Annual Report on Form 10-K for the
            fiscal year ended December 31, 1995 and incorporated herein by
            reference.

10(i)(c).   Amendment to Exhibit 10(i)(a) dated as of February 1, 1993, filed as
            Exhibit 10(i)(c) to the Company's Annual Report on Form 10-K for the
            fiscal year ended


                                      IV-3

<PAGE>

            December 30, 1992 and incorporated herein by reference.

10(i)(d).   Shareholders' Agreement dated May 20, 1992 among Clal Electronics
            Industries Ltd., the Company, Discount Investment Corporation Ltd.
            and International Paper Company, filed as Exhibit A to Amendment No.
            13 to the Company's Statement on Schedule 13D in respect of ordinary
            shares of Scitex Corporation Ltd. held as of June 12, 1992 and
            incorporated herein by reference.

10(i)(e).   Business Opportunities Agreement dated as of November 30, 1993 among
            the Company, DIC Finance and Management Ltd., and, for the purpose
            of section 5 thereof only, PEC Finance Company Ltd. and Discount
            Investment Corporation Ltd., filed as Exhibit 10(i)(f) to the
            Company's Annual Report on Form 10-K for the fiscal year ended
            December 31, 1993 and incorporated herein by reference.

10(i)(f).   Amendment to Exhibit 10(i)(e) dated as of December 25, 1996, filed
            as Exhibit 10(i)(f) to the Company's Annual Report on Form 10-K for
            the fiscal year ended December 31, 1996 and incorporated herein by
            reference.

10(i)(g).   Agreement dated July 1, 1995 between IDB Development Corporation
            Ltd. and PEC Finance Company Ltd. (now named PEC Israel Financial
            Corporation Ltd.), filed as Exhibit 10(i)(f) to the Company's Annual
            Report on Form 10-K for the fiscal year ended December 31, 1995 and
            incorporated herein by reference.

10(i)(h).   Voting Agreement dated June 10, 1997 by and among Discount
            Investment Corporation Ltd., the Company and Delek Investments and
            Properties Ltd.

10(i)(i).   Application to Israel Discount Bank Ltd. dated March 4,1998 for the
            Allocation of a Credit Line in Foreign Currency to the Company.

10(i)(j).   Agreement dated January 31, 1993 among the Company, DIC Energy
            Holdings Ltd. and N.E.K. Properties Ltd. in respect of ordinary
            shares of Tambour Ltd., filed as Exhibit 10(i)(k) to the Company's
            Annual Report on Form 10-K for the fiscal year ended December 31,
            1992 and incorporated herein by reference.

10(i)(k).   Exchange Agreement dated as of January 4, 1994 among the Company,
            PEC Holdings Limited and IDB Development Corporation Ltd., filed as
            Exhibit 10(i)(l) to the Company's Annual Report on Form 10-K for the
            fiscal year ended December 31, 1993 and incorporated herein by
            reference.


                                      IV-4

<PAGE>

10(iii)(a). Supplemental Retirement Agreement dated as of January 1, 1995
            between the Company and Frank J. Klein, filed as Exhibit 10(iii)(b)
            to the Company's Annual Report on Form 10-K for the fiscal year
            ended December 31, 1994 and incorporated herein by reference.*

21.         Subsidiaries of the Registrant.

27.         Financial Data Schedule

                Reports on Form 8-K:

        (b)  No reports on Form 8-K were filed during the fiscal quarter ended
             December 31, 1997.

----------
*This is a management contract or a compensatory plan or arrangement required to
be filed as an exhibit.


                                     IV-5

<PAGE>


Property and Building Corporation Limited and Subsidiaries
Financial Statements
December 31, 1997

<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Contents

<TABLE>
<CAPTION>
                                                                             Page
                                                                             ----
<S>                                                                          <C>
Auditors' Report                                                               2

Balance Sheets                                                                 3

Statements of Earnings                                                         5

Statement of Shareholders' Equity                                              6

Statements of Cash Flows                                                       7

Notes to the Financial Statements                                             10

Annex - Percentage of Holding in Related Companies                            61
</TABLE>

<PAGE>

Somekh Chaikin

Tel-Aviv, March 11, 1998

Auditors' Report to the Shareholders of
Property and Building Corporation Limited

We have audited the financial statements of Property and Building Corporation
Limited (hereinafter "the Company") and its consolidated financial statements,
as follows:

-        Balance sheets as at December 31, 1997 and 1996.
-        Statements of earnings, statements of changes in shareholders' equity
         and statements of cash flows for each of the three years the last of
         which 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 certain subsidiaries, including
those consolidated by the proportionate consolidation method, whose assets
constitute 80% and 72% of the total consolidated assets as at December 31, 1997
and 1996 respectively, and whose revenues constitute 72%, 90% and 86% of the
consolidated revenues for the years ended on December 31, 1997, 1996 and 1995
respectively. The financial statements of those subsidiaries were audited by
other auditors whose reports thereon were furnished to us. Our opinion, insofar
as it relates to amounts emanating from the financial statements of such
subsidiaries, is based solely on the said reports of the other auditors.
Furthermore, the data included in the financial statements which relates to the
net asset value of an affiliate and the Company's equity in its earnings is
based on financial statements which were audited by other auditors.

We conducted our audits in accordance with generally accepted auditing
standards, including standards prescribed by the Auditors Regulations (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 provide a fair basis for our
opinion.


<PAGE>


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. Condensed data in
nominal historical values, on the basis of which the adjusted financial
statements were prepared, is presented in Note 34.

In our opinion, based on our audit and on the reports of the abovementioned
other auditors, the financial statements referred to above present fairly, in
all material respects, in conformity with accounting principles generally
accepted in Israel, consistently applied, the financial position of the Company
and the consolidated financial position of the Company and its subsidiaries as
at December 31, 1997 and 1996 and the results of their operations, the changes
in the shareholders' equity and their cash flows for each of the three years the
last of which ended December 31, 1997. Furthermore, these statements have, in
our opinion, been prepared in accordance with the Securities Regulations
(Preparation of Annual Financial Statements) 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 affects the determination of historical net earnings
and shareholders' equity to the extent summarized in Note 35 C to the financial
statements.


/s/Somekh Chaikin
-----------------------------------
Certified Public Accountants (Isr.)


<PAGE>


Balance Sheets as at December 31
--------------------------------------------------------------------------------

In terms of shekels of December 1997
(in NIS thousands)

<TABLE>
<CAPTION>
                                                  Consolidated             The Company
                                       -----------------------      ------------------
                                Note        1997          1996        1997        1996
                               -----   ---------     ---------      ------      ------
<S>                            <C>     <C>           <C>            <C>         <C>
Current Assets
Cash and cash
 equivalents                     2       155,202        58,376       1,504       1,151
Short-term deposits
 and loans                                 1,628        16,861
Marketable securities            3        35,509        34,722         593         625
Trade receivables                4        20,406        42,186
Other receivables
 and debit balances              5        20,314        23,579       5,390       3,754
Apartments and other
 inventories                     6         6,162        18,838       1,325
Building projects
 under construction              7       129,818        81,820       2,634       7,143
                                       ---------     ---------      ------      ------
                                         369,039       276,382      11,446      12,673
                                       ---------     ---------      ------      ------
Land                             8       399,671       418,941       8,719      20,658
                                       ---------     ---------      ------      ------
Long-term loans and
 deposits                        9         3,247         1,332       2,615       1,133
                                       ---------     ---------      ------      ------
Investments                     10
In investee companies                    116,691       135,850     894,189     844,286
                                       ---------     ---------      ------      ------
Fixed Assets                    11
Buildings, land,
 plantations and other                 1,330,092     1,165,980      51,625      50,622
Less/- Accumulated
 depreciation                            312,711       290,978      21,672      20,732
                                       ---------     ---------      ------      ------
                                       1,017,381       875,002      29,953      29,890
                                       ---------     ---------      ------      ------
Deferred Charges
 and Other Assets               12        24,223        14,006         377         405
                                       ---------     ---------      ------      ------
                                       1,930,252     1,721,513     947,299     909,045
                                       ---------     ---------      ------      ------
                                       ---------     ---------      ------      ------
</TABLE>

The notes and the annex are an integral part of the financial statements.


<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

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



<TABLE>
<CAPTION>
                                                                    Consolidated             The Company
                                                         -----------------------     -------------------
                                                Note          1997          1996        1997        1996
                                                ----     ---------     ---------     -------     -------
<S>                                             <C>      <C>           <C>           <C>         <C>
Current Liabilities
Advances from purchasers
 of apartments and
 others, net                                      13         4,000        11,842         974      10,115
Short-term credit
 from banks                                       14        25,195        13,108                     373
Current maturities of long -
term liabilities                                            44,138        50,782       2,402       8,944
Suppliers and
 contractors                                      15         9,125        10,217
Creditors and
 credit balances                                  16        71,032        77,778      31,749      46,803
Deferred taxes                                    17         2,161        14,880          45
Proposed dividend                                           23,107        17,427      17,000      12,304
                                                         ---------     ---------     -------     -------
                                                           178,758       196,034      52,170      78,539
                                                         ---------     ---------     -------     -------
Long-term Liabilities

Convertible debentures                            18       228,549        52,433
Debentures                                        18        35,897        40,617
Liabilities to banks and
 provident funds                                  18       205,936       225,577                     372
Other long term liabilities                       18        58,553        63,618       8,100
Deferred taxes                                    17        19,743        17,487       1,191          28
Liability for employee
 severance benefits, net                          19         2,362         2,388                       1
                                                         ---------     ---------     -------     -------
                                                           551,040       402,120       9,291         401
                                                         ---------     ---------     -------     -------
Minority interest                                          304,648       283,286
                                                         ---------     ---------     -------     -------
Receipt on account of
 option warrants in
 a subsidiary                                                9,968         9,968
                                                         ---------     ---------     -------     -------
Shareholders' Equity                                       885,838       830,105     885,838     830,105
                                                         ---------     ---------     -------     -------
Contingent Liabilities
 and Commitments                                  20

                                                         1,930,252     1,721,513     947,299     909,045
                                                         ---------     ---------     -------     -------
                                                         ---------     ---------     -------     -------
</TABLE>

/s/Dov Tadmor
----------------------------------
Dov Tadmor - Chairman of the Board

/s/Abraham Attias
----------------------------------
Abraham Attias - Managing Director

March 11, 1998

                                       4

<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Statements of Earnings for the Year Ended December 31
-------------------------------------------------------------------------------

In terms of shekels of  December 1997
(in NIS thousands)

<TABLE>
<CAPTION>
                                                                                Consolidated                         The Company
                                                             -------------------------------     --------------------------------
                                                     Note       1997        1996        1995        1997        1996         1995
                                                     ----    -------     -------     -------     -------      ------       ------
<S>                                                  <C>     <C>         <C>         <C>         <C>          <C>          <C>
Income
Rentals and warehousing                                      137,293     128,834     117,891       7,844       7,667        7,672
From construction and other sources                   21     268,966     230,070     235,542      53,163        --           --
The Company's equity in the
 net earnings of investee companies                   22       6,550      12,693      12,913      60,168      63,620       60,441
Gain on sale of investments and fixed assets          23      10,113       2,842       6,648         603          74          116
Income from securities, financing and others          24      11,781       6,922       8,046       2,049       2,482        2,332
                                                             -------     -------     -------     -------      ------       ------
                                                             434,703     381,361     381,040     123,827      73,843       70,561
                                                             -------     -------     -------     -------      ------       ------
Costs and Expenses
Construction and other costs                          25     195,743     161,615     174,872      38,428        --           --
Administrative and general                            26      32,065      31,099      30,205       7,207       6,834        6,664
Selling and marketing                                 27       4,995       3,817       3,364         877        --           --
Property maintenance (excluding depreciation)                 11,266      10,537      10,451         780         813          808
Depreciation and amortization                                 22,513      19,861      18,056         967       1,262        1,244
Property taxes on land                                28       8,700       7,585       5,990         850         966          500
Financing                                             29      24,074      16,480       5,076       1,083       3,123        2,834
                                                             -------     -------     -------     -------      ------       ------
                                                             299,356     250,994     248,014      50,192      12,998       12,050
                                                             -------     -------     -------     -------      ------       ------
Earnings before taxes on income                              135,347     130,367     133,026      73,635      60,845       58,511

Taxes on income                                       30      43,532      42,640      46,693       6,040        (927)        (975)
                                                             -------     -------     -------     -------      ------       ------
Earnings after taxation                                       91,815      87,727      86,333      67,595      61,772       59,486
                                                             -------     -------     -------     -------      ------       ------
Less/- Minority interest in earnings                          24,220      25,955      26,847        --          --           --
                                                             -------     -------     -------     -------      ------       ------
Net earnings for the year                                     67,595      61,772      59,486      67,595      61,772       59,486
                                                             -------     -------     -------     -------      ------       ------
                                                             -------     -------     -------     -------      ------       ------
Earnings Per Share
Net earnings per share of a par value
 of NIS 1.00 (in NIS)                                          16.40       15.87       16.29       16.40       15.87        16.29
                                                             -------     -------     -------     -------      ------       ------
                                                             -------     -------     -------     -------      ------       ------
</TABLE>

The notes and the annex are an integral part of the financial statements.

                                       5

<PAGE>


                              Property and Building Corporation and Subsidiaries

Statements of Shareholders' Equity
-------------------------------------------------------------------------------

In terms of shekels of December 1997
(in NIS thousands)

<TABLE>
<CAPTION>
                                     Share      Capital     Premium   Capitalized
                                   capital      surplus   on shares    surplus in    Retained
                                                                     subsidiaries    earnings       Total
                                   -------     --------   ---------  ------------    --------    --------
<C>                                <C>          <C>       <C>        <C>             <C>           <C>
Balance as at January 1, 1995      177,805     *143,373                  13,490      303,978      638,646

Net earnings for the year                                                             59,486       59,486

Capital surplus from
 private placement of
 shares of a subsidiary                                                  12,464                    12,464

Inflationary erosion of
 dividend declared in the
 previous year                                                                            89           89

Proposed dividend, net - 240%                                                        (10,057)     (10,057)
                                   -------     --------   ---------  ------------    --------    --------
Balance as at December 31,
 1995                                7,805      143,373                  25,954      353,496      700,628

Net earnings for the year                                                             61,772       61,772

Issue of shares                        616                  78,800                                 79,416

Inflationary erosion of
 dividend declared in the
 previous year                                                                           593          593

Proposed dividend - 280%                                                             (12,304)     (12,304)
                                   -------     --------   ---------  ------------    --------    --------
Balance as at December 31,
 1996                              178,421      143,373     78,800       25,954      403,557      830,105

Net earnings for the year                                                             67,595       67,595

Issue of shares                         27                   4,098                                  4,125

Tax benefit in respect of the
 exercise of share purchase
 options by employees                               613                                               613

Inflationary erosion of dividend
 declared in the previous year                                                           400          400


Proposed dividend - 412%                                                             (17,000)     (17,000)
                                   -------     --------   ---------  ------------    --------    --------
Balance as at December 31,
 1997                              178,448      143,986     82,898       25,954      454,552      885,838
                                   -------     --------   ---------  ------------    --------    --------
                                   -------     --------   ---------  ------------    --------    --------
</TABLE>


*  Capital surplus created until 31.12.91

                                       6

<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Statements of Cash Flows for the Year Ended December 31
--------------------------------------------------------------------------------

In terms of shekels of December 1997
(in NIS thousands)

<TABLE>
<CAPTION>
                                                                                     Consolidated                      The Company
                                                                ---------------------------------     ----------------------------
                                                                    1997         1996        1995       1997       1996       1995
                                                                --------     --------    --------     ------    -------     ------
<S>                                                             <C>          <C>         <C>          <C>       <C>         <C>
Cash flows generated by operating activities

Net earnings                                                      67,595       61,772      59,486     67,595     61,772     59,486
Adjustments to reconcile net earnings to
 net cash flows generated by operating activities (Annex):        43,258       57,918      25,211    (96,502)   (25,110)   (61,143)
                                                                --------     --------    --------     ------    -------     ------
Net cash inflow (outflow) generated by operating activities      110,853      119,690      84,697    (28,907)    36,662     (1,657)
                                                                --------     --------    --------     ------    -------     ------
Cash flows generating by investing activities

Proceeds from realization of investment
 in investee companies                                            27,435         --          --         --         --         --
Investments in investee companies                                 (2,705)     (37,164)     (4,177)    (4,387)   (93,857)      (169)
Dividend received from investee companies                          7,858        8,149       9,338     16,794     12,761     11,172
Purchase of marketable securities                                (38,902)    (602,871)    (39,138)       (34)       (10)      (186)
Proceeds from sale of marketable securities                       41,303      608,465     104,649         91        120        185
Acquisition and development of land                              (35,857)    (121,809)   (129,439)    (2,484)    (4,907)    (6,921)
Purchase and construction of fixed assets                       (150,787)    (125,904)   (120,391)    (1,003)      (155)    (3,023)
Collections of credit relating to sale of real estate              1,537        1,714         684       --         --         --
Proceeds from sale of fixed assets and real estate                 1,088        2,024       8,278       --           31       --
Repayment of long-term deposits and loans                          1,840          728       1,498       --         --           58
Repayment (Granting) of short-term deposits                       15,233      (16,504)       --         --         --         --
Granting of long-term loans                                       (2,895)        --          --       (2,125)    (1,133)      --
Granting of loans to subsidiaries                                   --           --          --         --         --         (889)
Repayment of loans to subsidiaries                                  --           --          --       10,735        789        894
                                                                --------     --------    --------     ------    -------     ------
Net cash inflow (outflow) generated by investing activities     (134,853)    (283,172)   (168,698)    17,587    (86,361)     1,121
                                                                --------     --------    --------     ------    -------     ------
</TABLE>

                                       7

<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Statements of Cash Flows for the Year Ended December 31 (cont'd)
--------------------------------------------------------------------------------


In terms of shekels of December 1997
(in NIS thousands)

<TABLE>
<CAPTION>
                                                                                   Consolidated                      The Company
                                                                -------------------------------     ----------------------------
                                                                   1997        1996        1995       1997       1996      1995
                                                                -------     -------     -------     ------     ------     -----
<S>                                                             <C>         <C>         <C>         <C>         <C>        <C>
Cash flows generated by financing activities

Dividend paid
- by the parent company                                         (11,904)     (9,464)     (7,622)    (11,904)    (9,464)   (7,622)
- to outside shareholders of subsidiary companies                (4,957)     (4,525)     (3,843)       --         --        --
Payment of debentures                                            (8,945)    (13,230)    (12,831)       --         --        --
Payment of long term loans                                      (62,359)     (3,215)    (15,588)       (373)      (295)     (297)
Receipt of long-term loans                                       31,056     136,478     119,416        --         --        --
Receipt of long-term loan from subsidiary                          --          --          --         1,427    (20,086)    8,549
Receipt of credit from subsidiary company                          --          --          --        18,771       --        --
Receipt (repayment) of short-term bank credit                    12,087     (15,604)     19,703        (373)       373      --
Payments to outside shareholders of subsidiary                      (73)       (456)     (2,711)       --         --        --
Repayments of credit in respect of real estate acquisition      (13,359)    (33,637)    (19,984)       --         --        --
Securities issue by a subsidiary                                175,155      64,021        --          --         --        --
Share issue by the Company                                        4,125      79,416        --          --       79,416      --
                                                                -------     -------     -------      ------     ------     -----
Net cash inflow generated by financing activities               120,826     199,784      76,540      11,673     49,944       630
                                                                -------     -------     -------      ------     ------     -----
Net increase (decrease) in cash and cash equivalents             96,826      36,302      (7,461)        353        245        94
Cash and cash equivalents at beginning of year                   58,376      22,074      29,535       1,151        906       812
                                                                -------     -------     -------      ------     ------     -----
Cash and cash equivalents at end of year                        155,202      58,376      22,074       1,504      1,151       906
</TABLE>

                                       8



<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Statements of Cash Flows for the Year Ended December 31 (cont'd)
--------------------------------------------------------------------------------

In terms of shekels of December 1997
(in NIS thousands)

<TABLE>
<CAPTION>
                                                                      Consolidated                             The Company
                                                  --------------------------------      ----------------------------------
                                                    1997         1996         1995         1997         1996         1995
                                                  ------       ------       ------      -------      -------      -------
<S>                                               <C>          <C>          <C>         <C>          <C>          <C>
Annex

Adjustments to reconcile net earnings to
 net cash generated by operating activities:

Cash flows not involving cash flows:

The Company's equity in the net
 earnings of investee companies                   (6,550)     (12,693)     (12,913)     (60,168)     (63,620)     (60,441)
Outside shareholders' interest in earnings        24,220       25,955       26,847         --           --           --
Depreciation and amortization                     23,189       20,418       18,634          967        1,262        1,244
Net changes in deferred taxes                    (17,691)       4,145       (2,328)       1,538       (1,651)      (1,395)
Increase (decrease) in liability for
 employee severance benefits                         (26)         (85)         361           (1)           1         --
Decrease (increase) in value of securities        (3,188)      (4,984)        (425)         (25)         (24)          36
Income from realization of investments
 in investee companies and issue of capital      (10,153)         (53)         (62)        (603)         (53)         (62)
Capital losses (gains) on sale of fixed
 assets and real estate                               40       (2,789)      (6,586)        --            (21)         (54)
Inflationary erosion of long-term
 deposits and loans, net                           5,921        1,695          (23)         411          113          (80)
Amortization of debenture discount                 1,058          832         --           --           --           --

Changes in current assets and liabilities:
Trade receivables                                 21,779      (15,078)      (4,986)        --          1,419         (247)
Trade and other receivables                        2,186       18,607      (24,980)      (1,240)       6,783        3,081
Construction costs, net                             (437)      20,302        9,167       (4,169)        --           --
suppliers and subcontractors                      (1,092)       2,808        5,172         --           --           --
Other payables                                     4,002       (1,162)      17,333      (33,212)      30,680       (3,225)
                                                  ------       ------       ------      -------      -------      -------
Total adjustments                                 43,258       57,918       25,211      (96,502)     (25,110)     (61,143)
                                                  ------       ------       ------      -------      -------      -------
                                                  ------       ------       ------      -------      -------      -------
Significant non-cash transactions:
Purchase of fixed assets on credit                   302       10,536       69,323
                                                  ------       ------       ------
Purchase of real estate on credit                                            2,965
                                                                            ------
Sale of fixed assets on credit                                 (1,537)     (1,714)
                                                               ------       ------
</TABLE>

                                       9



<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------



Note 1 - Reporting Principles and Accounting Policies

         A.       Reporting Principles

         1.       Definitions

                  In these financial statements:

                  a.       Subsidiaries - companies whose financial statements
                           are consolidated directly or indirectly with those of
                           Property and Building Corporation Limited (the
                           "Company").

                  b.       Proportionately consolidated subsidiaries - companies
                           whose financial statements are consolidated with
                           those of the Company by the proportionate
                           consolidation method.

                  c.       Affiliated companies - companies, except for
                           subsidiaries and proportionately consolidated
                           subsidiaries, the investment in which is included
                           directly or indirectly on the equity basis in the
                           company's statements.

                  d.       Investee companies - subsidiaries, proportionately
                           consolidated subsidiaries and affiliated companies.

                  e.       Other companies - companies which are not investee
                           companies.

                  f.       Initial difference - difference between acquisition
                           cost and adjusted net asset value of investments in
                           shares of investee companies as at acquisition date.

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

                  h.       Interested parties - as defined in the Israeli
                           Securities Law.

                  i.       Group - The Company and her subsidiaries

         2.       The financial statements have been prepared in a format
                  suited, in the opinion of the Management, to the Company's
                  type of business.

         B.       Financial statements in adjusted values

         1.       The Company prepares the adjusted financial statements on the
                  basis of cost adjusted for the changes in the general
                  purchasing power of the shekel (see Note 34 for condensed
                  financial statements in nominal historical values).

         2.       The adjusted value of non-monetary assets do not purport to
                  reflect their real economic or market value but rather
                  historical cost adjusted for the changes in the purchasing
                  power of the shekel.

         3.       In the adjusted financial statements, the term, "cost" means
                  "adjusted cost".

         4.       Comparative figures have also been adjusted to the shekel of
                  December 1997.


                                       10


<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 1 - Reporting Principles and Accounting Policies (cont'd)

         C.       Principles of adjustment

         1.       Balance sheet

                  Non-monetary items (construction work and advances, real
                  estate, investment in companies, fixed assets, deferred
                  charges, share capital), have been adjusted on the basis of
                  changes in the consumer price index from the index published
                  in respect of the month of the transaction to the index
                  published in respect of the month of the balance sheet date.
                  Monetary items are stated in the adjusted balance sheet at
                  their historical values.

                  The net asset value of investments in investee companies is
                  determined on the basis of the adjusted financial statements
                  of these companies.

         2.       Statement of earnings

                  a.       The various items of the statement of earnings have
                           been adjusted according to the changes in the
                           consumer price index as follows:

                           1)       Income and expenses deriving from
                                    non-monetary items (such as depreciation and
                                    amortization, building projects, changes in
                                    inventory, prepayments and deferred income,
                                    etc.) or from provisions included in the
                                    balance sheet (e.g., provisions for
                                    severance pay, holiday pay, etc.) have been
                                    adjusted on the basis of specific indices
                                    parallel to the adjustment of the related
                                    balance sheet item.

                           2)       The remaining items in the statement of
                                    earnings (e.g., rental income, selling,
                                    general and administrative expenses) except
                                    for components of the financing item, have
                                    been adjusted on the basis of the index in
                                    respect of the month in which the
                                    transaction was effected.

                           3)       The calculation of the Company's equity in
                                    the results of operation of the investee
                                    companies and the outside shareholders'
                                    share in the results of operation of the
                                    subsidiaries was based on the adjusted
                                    financial statements of such companies.

                           4)       The net financing items which cannot be
                                    independently calculated is derived from the
                                    other items of the statement of earnings.
                                    This includes, inter alia, amounts required
                                    to adjust various items in the statement of
                                    earnings in respect of the inflationary
                                    component of the financing therein.


                                       11


<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 1 - Reporting Principles and Accounting Policies (cont'd)

         C.       Principles of adjustment (cont'd)

                  b.       Taxes on income

                           Current taxes comprise payments on account made
                           during the year plus amounts due at balance sheet
                           date (or less amounts refundable at balance sheet
                           date). The payments on account have been adjusted on
                           the basis of the consumer price index of the date the
                           payments were made. Those amounts payable (or
                           refundable) have been included unadjusted. Current
                           taxes include, therefore, the expense derived from
                           the inflationary erosion of the value of payments
                           made on account from the time of payment to the year
                           end.

                           Deferred taxes - see Note D.11. below.

         3.       Statement of shareholders' equity

                  The dividend that was declared and actually paid in the year
                  has been adjusted on the basis of the consumer price index at
                  the date of payment. The dividend proposed/declared during the
                  year but unpaid at the balance sheet date is included with no
                  adjustment.

                  The amount stated as "erosion in value of dividend" reflects
                  the erosion of the real value of the dividend
                  proposed/declared in the previous year and actually paid
                  during the current year (this erosion relates to the period
                  from the beginning of the current year up to the date of
                  payment).

                  The difference between the net asset value of companies
                  transferred from the Company to a subsidiary and the
                  consideration given in exchange thereof, by way of issue of
                  shares, has been carried to a capital reserve in accordance
                  with a guideline based on Section 36A of the Securities Law -
                  1968.

         4.       Statement of cash flows

                  The statement has been prepared in accordance with Opinion No.
                  51 of the Institute of Certified Public Accountants in Israel.
                  The statement provides information on cash receipts and
                  payments during the year from current activities, investment
                  and finance, and is expressed in terms of shekels of the end
                  of the current year.


                                       12


<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 1 - Reporting Principles and Accounting Policies (cont'd)

         D.       Accounting policies (cont'd)

         1.       Consolidated financial statements

                  a.       The consolidated financial statements include the
                           financial statements of the Company and the Company's
                           subsidiaries. (See Appendix to the Financial
                           Statements).

                  b.       In addition to the above companies which were fully
                           consolidated, certain companies under joint ownership
                           were consolidated by the proportionate consolidation
                           method in accordance with Opinion No. 57 of the
                           Institute of Certified Public Accountants in Israel.

                  c.       For the purposes of consolidation, the amounts in the
                           financial statements of the subsidiary companies
                           being consolidated were included after adjustments
                           required in respect of application of the uniform
                           accounting principles of the Group.

                  d.       Balances between subsidiaries and inter-company
                           profits from sales between the companies not yet
                           realized outside of the Group were cancelled.

                  e.       Real estate properties of the Company and its
                           subsidiaries that are requested in the name of other
                           subsidiaries that are property companies (which were
                           established for the sole purpose of holding real
                           estate or for their rental) are included in the
                           balance sheets based on the cost of these assets to
                           those subsidiaries.

                           In the statement of earnings, the income and expenses
                           relating to the above assets were included based on
                           the Company's rate of holding in the stated
                           subsidiary companies.

         2.       Marketable securities

                  a.       Marketable government bonds and other marketable
                           securities are stated at their market value as at
                           balance sheet date.

                  b.       Mutual fund certificates in trust funds are stated at
                           redemption value as at balance sheet date.

                  c.       Changes in value of securities are fully recognized
                           on a current basis.

         3.       Building projects

                  a.       The Company and subsidiary construction companies
                           record construction work on the basis of approved
                           invoices and amounts paid on account to the
                           contractors, designers and others.

                  b.       The completed units and units under construction are
                           stated in the financial statements at cost but not
                           exceeding their market value.


                                       13


<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 1 - Reporting Principles and Accounting Policies (cont'd)

         D.       Accounting policies (cont'd)

         4.       Inventory of air-conditioning and other equipment

                  Inventory is valued at the lower of cost or market value, cost
                  being determined on the "FIFO" basis.

         5.       Land

                  a.       Land is stated at cost which is not in excess of
                           market value.

                  b.       The portion of the land which is in the stage of
                           construction is included in building projects and
                           stated under current assets or as a deduction from
                           advances from purchasers of apartments under current
                           liabilities.

                  c.       Shops in completed buildings are stated at cost but
                           not in excess of market value.

         6.       Investments in related and other companies

                  a.       Investments in investee companies are stated on the
                           equity basis. The investments in shares of other
                           companies, which are not quoted securities, are
                           stated at cost which, in Management's opinion, is not
                           less than its fair value.

                  b.       The Company's equity in the profits and losses of the
                           investee companies is based on the latest audited
                           financial statements of these companies, after
                           adjustments required from the application of the
                           uniform accounting principles of the Group.

                  c.       The initial difference regarding investee companies,
                           is allocated to assets of such companies (building
                           projects, real estate and fixed assets) and their
                           amortization as an expense or as income is made in
                           accordance with the life of those assets or upon
                           their realization; amounts which cannot be allocated
                           to such assets are amortized at 20% per year.

         7.       Fixed assets

                  Fixed assets are stated at cost. Depreciation is computed by
                  the straight line method over the estimated useful life of the
                  assets.

         8.       Other assets - Initial difference which cannot be allocated to
                  assets - see Note 1.D.6.c.


                                       14


<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 1 - Reporting Principles and Accounting Policies (cont'd)

         D.       Accounting policies (cont'd)

         9.       Deferred charges

                  a.       Expenses relating to the issue of the debentures are
                           written off against income over the life of the
                           debentures in proportion to their outstanding
                           balance.

                  b.       Taxes in connection with unrealized profits from real
                           estate transactions - taxes relating to real estate
                           transaction are amortized over the life of the asset
                           or parallel to the period of transaction.

         10.      Convertible of debentures

                  a.       Debentures, the conversion of which is not, as at
                           balance sheet date, expected according to guidelines
                           set by the Institute, are stated as long-term
                           liabilities. The debentures include the liabilities
                           at balance sheet date in accordance with the
                           conditions of the issue, less the discount which has
                           not been amortized as at balance sheet date.

                  b.       The above discount (resulting from the difference
                           between amount of the linked liability at the date of
                           the issue and the nominal value of the debentures) is
                           amortized using the straight line method over the
                           period of the debentures in proportion to their
                           outstanding balance.

         11.      Deferred taxes

                  The calculation of deferred taxes in the adjusted financial
                  statements account mainly for the following areas of timing
                  differences of items between their being charged in the
                  financial statements and their inclusion in chargeable income
                  for tax purposes, or because their treatment for tax purposes
                  is different:

                  a.       Differences between the undepreciated cost of
                           depreciable assets for tax purposes and their
                           undepreciated cost in the financial statements.

                  b.       Differences in recognition of income from marketable
                           securities held from the beginning of the year.

                  c.       Differences relating to adjustment of cost of
                           inventory, advances from customers, adjustment of
                           land and development.


                                       15


<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 1 - Reporting Principles and Accounting Policies (cont'd)

         D.       Accounting policies (cont'd)

         11.      Deferred taxes (cont'd)

                  d.       Expenses allowable in the future for tax purposes -
                           sales expenses, administrative expenses, and finance
                           expenses that for tax purposes were allocated to
                           buildings under construction, provisions for holiday
                           pay and severance pay.

                  e.       The deduction for inflation which is carried forward
                           to future years.

                  f.       Losses for tax purposes which are expected to be
                           realized.

                  g.       Advance rental payments which are liable to tax upon
                           receipt and other timing differences.

                           Deferred taxes are computed using the tax rate
                           expected to be in effect at the time of reversal as
                           known at the time of the preparation of the financial
                           statements.

                           No deferred tax was computed in respect of
                           investments in investee companies as the intention of
                           the Management is to hold these companies and not to
                           realize them.

         12.      Income recognition

                  a.       Income from rent -
                           Rental income is recognized in the period to which
                           the rent related, amounts in arrears are recognized
                           only upon collection.

                  b.       Income from construction work -
                           Income from construction transactions is recognized
                           according to the "completed contract" method, that is
                           when the construction work has been completed and the
                           major part of the constructed units has been sold
                           where all the constructed units have been sold before
                           they have been completed, income is recognized
                           according to the "percentage of completion method".

                           A subsidiary whose operations is installing air
                           conditioning systems as an executing contractor,
                           recognizes income from long-term projects by the
                           "percentage of completion method".

         13.      Provision for doubtful debts

                  The provision for doubtful debts is calculated on the basis of
                  specific identification of balances whose collection is in
                  doubt.


                                       16


<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 1 - Reporting Principles and Accounting Policies (cont'd)

         D.       Accounting policies (cont'd)

         14.      Foreign currency and linkage

                  Assets and liabilities that are linked or denominated in
                  foreign currency are included as follows:

                  a.       Balances linked to the consumer price index are
                           stated in the balance sheet according to the index in
                           respect of the last month of the reported year except
                           for balances which are linked to the known index
                           which are adjusted according to the last index
                           published as at the date of the financial statements.

                  b.       Foreign currency balances or those linked to foreign
                           currency are adjusted using the representative rate
                           published by the Bank of Israel as at balance sheet
                           date.

                  Data concerning consumer price index and foreign currency
                  rates:

<TABLE>
<CAPTION>
                                                                                                        % of change
                                                                            ---------------------------------------
                             December 31     December 31     December 31    December 31   December 31   December 31
                                    1997            1996            1995           1997          1996          1995
                             -----------     -----------     -----------    -----------   -----------   -----------
<S>                          <C>             <C>             <C>            <C>           <C>           <C>
Consumer price
 index, in points              153.1            143.1            129.4          7.0          10.6          8.1

Consumer price
 index, (latest
 known index)
 in points                     153.6            142.0            127.9          8.2          11.0          7.8

Exchange
 rate of the
 U.S. dollar,
 in NIS                        3.536            3.251            3.135          8.8           3.7          3.9
</TABLE>


         15.      Earnings per share

                  Earnings per share were calculated in accordance with Opinion
                  No. 55 of the Institute of Certified Public Accountants in
                  Israel, based on the par value of the issued and paid up share
                  capital outstanding during the year as stated in Note 34D.


                                       17


<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 2 - Cash and Cash Equivalents

<TABLE>
<CAPTION>
                                                      Consolidated                   The Company
                                       ---------------------------    --------------------------
                                       December 31     December 31    December 31    December 31
                                              1997            1996           1997           1996
                                       -----------     -----------    -----------    -----------
<S>                                    <C>             <C>            <C>            <C>
Short-term deposits with banks             154,912          56,865          1,499          1,150
Cash at bank                                   290           1,511              5              1
                                           -------          ------          -----          -----
                                           155,202          58,376          1,504          1,151
                                           -------          ------          -----          -----
                                           -------          ------          -----          -----
</TABLE>




Note 3 - Marketable Securities

<TABLE>
<CAPTION>
                                              Consolidated                  The Company
                                ---------------------------    ------------------------
                                December 31     December 31    December 31  December 31
                                       1997            1996          1997         1996
                               -----------     -----------    -----------  -----------
<S>                             <C>             <C>            <C>          <C>
Government loans                    20,273          22,895             --           --
Mutual fund certificates            10,140           8,429             --           --
Debentures issued by a
 subsidiary*                          --              --              593          625
Other debentures                       741           2,664             --           --
Shares                               1,492             503             --           --
Convertible securities               2,863             231             --           --
                                    ------          ------            ---          ---
                                    35,509          34,722            593          625
                                    ------          ------            ---          ---
                                    ------          ------            ---          ---
</TABLE>


* See Note 20 C (1)


                                       18


<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 4 - Trade Receivables

         A.       Composed of:

<TABLE>
<CAPTION>
                                                                  Consolidated
                                                   ---------------------------
                                                   December 31     December 31
                                                          1997            1996
                                                   -----------     -----------
<S>                                                <C>             <C>
Purchasers of apartments and shops                       4,399          30,584
With respect to rentals and warehousing*                10,346           7,074
With respect to air conditioning and other*              3,772           2,175
Notes receivable                                         1,889           2,353
                                                        ------          ------
                                                        20,406          42,186
                                                        ------          ------
                                                        ------          ------
* After deduction of allowance for
         doubtful debts                                  1,034             899
                                                        ------          ------
                                                        ------          ------
</TABLE>

         B. Purchasers of apartments are linked mainly to the construction
inputs index.

Note 5 - Other Receivables and Debit Balances

<TABLE>
<CAPTION>
                                                      Consolidated                   The Company
                                       ---------------------------    --------------------------
                                       December 31     December 31    December 31    December 31
                                              1997            1996           1997           1996
                                       -----------     -----------    -----------    -----------
<S>                                    <C>             <C>            <C>            <C>
Accrued income                               5,972           7,752            216            117
Purchasers of land*                             --           1,503             --             --
Deferred taxes                               5,098           5,180          3,115          3,445
Deposits and prepaid expenses                  948             704              8              8
Advances to Tax Authorities
 less provisions                             2,796           3,899             --             --
Current maturities of long-term
 loans to employees and
 deposits                                    1,227           2,162            726             13
Other debtors                                3,352           2,279          1,325            171
Israel Treasury - value
 added tax                                     921             265             --             --
                                            ------          ------          -----          -----
                                            20,314          23,744          5,390          3,754
                                            ------          ------          -----          -----
                                            ------          ------          -----          -----
</TABLE>

* Balance linked mainly to U.S. dollar.


                                       19


<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 6 - Apartments and Other Inventories

<TABLE>
<CAPTION>
                                                       Consolidated    The Company
                                          -------------------------    -----------
                                         December 31    December 31    December 31
                                                1997           1996           1997
                                         -----------   ------------    -----------
<S>                                      <C>           <C>             <C>
Apartments in completed building               5,319         17,741          1,325
Air-conditioning equipment and
 other                                           843          1,097           --
                                         -----------   ------------    -----------
                                               6,162         18,838          1,325
                                         -----------   ------------    -----------
                                         -----------   ------------    -----------
</TABLE>




Note 7 - Building Projects Under Construction

<TABLE>
<CAPTION>
                                                   Consolidated                     The Company
                                   ----------------------------     ---------------------------
                                   December 31      December 31     December 31     December 31
                                          1997             1996            1997            1996
                                   -----------      -----------     -----------     -----------
<S>                                <C>              <C>             <C>             <C>
Land                                    79,203           73,432           2,897          4,666
Construction work                      141,534          105,944           3,067          3,081
                                   -----------      -----------     -----------     -----------
Land and construction works            220,737          179,376           5,964          7,747
Less - Advances from
 apartment purchasers                   90,919           97,556           3,330            604
                                   -----------      -----------     -----------     -----------
                                       129,818           81,820           2,634          7,143
                                   -----------      -----------     -----------     -----------
                                   -----------      -----------     -----------     -----------

</TABLE>


                                       20

<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 8 - Land

         A.   Composed of:

<TABLE>
<CAPTION>
                                              Consolidated                      The Company
                               ---------------------------      ---------------------------
                               December 31     December 31      December 31     December 31
                                      1997            1996             1997            1996
                               -----------     -----------      -----------     -----------
<S>                            <C>             <C>              <C>             <C>
Freehold land *                    185,627         229,510            8,719          20,658
Leasehold land                     203,753         179,360
Stores in completed
 buildings and other
 installations                       5,385           5,385
Parking lot and sports
 center                              3,201           3,165
Expenses relating to
 future stages of
 construction                        1,705           1,521
                               -----------     -----------      -----------     -----------
                                   399,671         418,941            8,719          20,658
                               -----------     -----------      -----------     -----------
                               -----------     -----------      -----------     -----------

</TABLE>



         *    Including NIS 2.1 million in rights to land which have not yet
              been registered in the name of the subsidiary (the subsidiary did
              register a caveat).

              The land ownership rights in the area in which the land is located
              are in the process of being formalized. Once the process is
              completed the rights will be registered in the name of the
              Company.

         B.   In the opinion of Management the value of land exceeds the value
              stated in the balance sheet.

         C.   Leasehold rights in land:

<TABLE>
<CAPTION>
                               The lease            Cost
                              expires in
                              ----------        --------
<S>                           <C>               <C>
Capitalized leasehold              2,048         202,881
Uncapitalized leasehold            2,040             872*
                                                --------
                                                 203,753
                                                --------
                                                --------
</TABLE>


              *    The land has not as yet been registered in the name
                   of the Company at the Land Registry Office.


                                       21

<PAGE>
                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------

Note 9 - Long-term Loans and Deposits

         A.   Composition:

         (1)  In the consolidated balance sheet:

<TABLE>
                                                                                                             December 31
                                                                                       December 31, 1997            1996
                                                      --------------------------------------------------     -----------
                                      Interest             Total            Current              Balance         Balance
                                          rate                           maturities
                                    ----------         ---------         ----------          -----------     -----------
                                             %
                                    ----------
         <S>                        <C>                <C>               <C>                 <C>             <C>
         Loans to
          employees for
          issue of stock and
          realizing                          2             4,425              1,209                3,216           1,298
          options(c)
         Deposits with
          banks -
         For the granting
          of loans to
          apartment
          purchasers                         4                49                 18                   31              34
                                                       ---------         ----------          -----------     -----------

                                                           4,474              1,227                2,447           1,332
                                                       ---------         ----------          -----------     -----------
                                                       ---------         ----------          -----------     -----------
         (2)  In the company balance sheet:

         Loans to
          employees for
          issue of stock and
          realizing options                  2             3,341                726                2,615           1,133
                                                       ---------         ----------          -----------     -----------
                                                       ---------         ----------          -----------     -----------
</TABLE>

         B. The deposits and the loans are linked to the consumer price index.

         C. Employee loans are secured by liens on severance pay funds and
            insurance policies.

         D. Classification of long-term deposits and loans by years of maturity:

<TABLE>
                                                                       Consolidated                          The Company
                                                     ------------------------------        -----------------------------
                                                     December 31        December 31        December 31       December 31
                                                            1997               1996               1997              1996
                                                     -----------        -----------        -----------       -----------
<S>                                                  <C>                <C>                <C>               <C>
         Within 12 months - current
          maturities                                       1,227              2,162                726                13
                                                     -----------        -----------        -----------       -----------
                                                     -----------        -----------        -----------       -----------
         During second year                                1,070                 34                726

         During third year                                 1,014                                   726

         No date of redemption but no
          later than 2001                                  1,163              1,298              1,163             1,133
                                                     -----------        -----------        -----------       -----------

                                                           3,247              1,332              2,615             1,133
                                                     -----------        -----------        -----------       -----------
                                                     -----------        -----------        -----------       -----------
</TABLE>
                                       22
<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 10 - Investments in Investee Companies

         A.   Consolidated balance sheet

<TABLE>
                                                                                           December 31       December 31
                                                                                                  1997              1996
                                                                                           -----------       -----------
                                                                                                 Total             Total
                                                                                           -----------        -----------
<S>                                                                                        <C>               <C>




         1.   Composition:

         Affiliated companies

         Shares at cost, include -
          Adjusted net asset value at the date of
          acquisition (a)                                                                       93,582          *101,210

          Initial difference, net                                                                3,211            *8,411
                                                                                           -----------       -----------

                                                                                                96,793           109,621

         Add -
         The Company's share in the net post-
          acquisition profits                                                                   19,965            26,976

         Total amounts of the initial difference
          amortized                                                                             (1,796)           (1,144)
                                                                                           -----------       -----------

         Book value of shares (b)                                                              114,962           135,453
                                                                                           -----------       -----------
                                                                                           -----------       -----------
         Payment in respect of initial difference                                                1,332
          of subsidiary company (c)

         Other company                                                                             397               397
                                                                                           -----------       -----------
                                                                                           -----------       -----------
                                                                                               116,691           135,850
                                                                                           -----------       -----------
                                                                                           -----------       -----------
</TABLE>

         *    Reclassified


         (a)  The investment is presented net of dividends distributed by an
              affiliated company out of pre-acquisition earnings, amounting to
              NIS 4,839 thousand.

         (b)  Includes quoted shares whose adjusted equity value at balance
              sheet date is NIS 79,599 thousand (December 31, 1996 -
              NIS 98,167 thousand).  The market value of these shares at
              balance sheet date is NIS 103,445 thousand (December 31, 1996 -
              NIS 116,683 thousand).

         (c)  Payment on account of options in the subsidiary company (i.e.
              payment in respect of initial difference) amounted to NIS
              1,332 thousand.  The market value of the options as at
              December 31, 1997 is NIS 510 thousand.


                                       23

<PAGE>
                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------

Note 10 - Investments in Investee Companies

         A.    Consolidated balance sheet (cont'd)

         2.    The following are details pertaining to proportionally
               consolidated subsidiaries which were included in the
               consolidated financial statements of the company as at
               December 31, 1997 and 1996:
<TABLE>
                                                                                           December 31       December 31
                                                                                                  1997              1996
                                                                                           -----------       -----------
<S>                                                                                        <C>               <C>
         (a)  Balance sheet data

         Assets:
         Current assets                                                                            395             1,390
         Fixed assets                                                                           54,881            64,510
                                                                                           -----------       -----------

                                                                                                55,276            65,900
                                                                                           -----------       -----------
                                                                                           -----------       -----------
         Liabilities and shareholders' equity:
         Current liabilities                                                                     3,996             1,791
         Long-term liabilities                                                                  39,176            48,416
         Shareholders' equity                                                                   12,104            15,693
                                                                                           -----------       -----------
                                                                                                55,276            65,900
                                                                                           -----------       -----------
                                                                                           -----------       -----------
</TABLE>

<TABLE>

         (b)  Statements of earnings

                                                                                           December 31       December 31
                                                                                                  1997              1996
                                                                                           -----------       -----------
<S>                                                                                        <C>               <C>
         Income                                                                                  3,537             4,699
                                                                                           -----------       -----------

         Costs and expenses:

         Property maintenance                                                                      444               382

         Administrative and general                                                                485               546

         Financing, net                                                                              -               730

         Depreciation                                                                              826             1,369
                                                                                           -----------       -----------

                                                                                                 1,755             3,027
                                                                                           -----------       -----------

         Earnings before taxes                                                                   1,782             1,672

         Taxes on income                                                                           626               606
                                                                                           -----------       -----------

                                                                                                 1,156             1,066
                                                                                           -----------       -----------
                                                                                           -----------       -----------
</TABLE>

                                       24
<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 10 - Investments in Investee and Other Companies (cont'd)



         B.   Company balance sheet


<TABLE>

                                                    Subsidiaries         Affiliated        December 31       December 31
                                                                          companies               1997              1996
                                                     ------------        ----------        -----------       -----------
                                                                                                 Total             Total
                                                                                           -----------       -----------
<S>                                                 <C>                  <C>               <C>               <C>


         Shares at cost, include -
         Adjusted net asset value at the
          date of acquisition                            315,549              9,850            325,399           307,878

         Initial difference, net                           6,697              7,390             14,087            14,586
                                                    ------------         ----------        -----------       -----------
                                                         322,246             17,240            339,486           322,464
         Add -

         The Company's share in the net
          post-acquisition profits                       554,764              1,619            556,383           511,281

         Total amounts of the initial
          difference amortized                              (877)            (1,200)            (2,077)             (952)
                                                    ------------         ----------        -----------       -----------

         Book value of shares (1)                        876,133             17,659            893,792           832,793

         Loan (3)                                                                                                 11,096

         Other company                                       397                                   397               397
                                                    ------------         ----------        -----------       -----------

                                                         876,530             17,659            894,189           844,286
                                                    ------------         ----------        -----------       -----------
                                                    ------------         ----------        -----------       -----------

</TABLE>



         (1)  Includes quoted shares whose adjusted equity value at balance
              sheet date is NIS 776,284 thousand (December 31, 1996 - NIS
              777,196 thousand).  The market value of these shares at balance
              sheet date is NIS 1,034,750 thousand (December 31, 1996 - NIS
              838,445 thousand).

         (2)  Payment on account of options in the subsidiary company (i.e.
              payment in respect of initial difference) amounted to NIS
              1,332 thousand.  The market value of the options as at
              December 31, 1997 is NIS 510 thousand.

         (3)  1996 - The loan to an investee company is linked to the consumer
              price index, bear annual interest rates of 7%.



                                       25

<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 11 - Fixed Assets

      A.  Consolidated balance sheet:

<TABLE>
<CAPTION>

                                      Commercial          Land     Buildings  Plantations   Vehicles    Machinery      Other
                                       buildings      intended         under          and                     and     assets
                                      leased out       for the  construction   irrigation               equipment
                                      and office  construction                    network
                                        premises  of buildings
                                                       thereon
                                             (1)     (1)(2)(3)                        (4)
                                      ----------  ------------  -----------   -----------  ----------   ---------     ------
<S>                                   <C>         <C>           <C>           <C>          <C>          <C>           <C>
  Cost

         Balance at beginning
          of year                       774,362       234,557       129,138        8,140      4,982        7,153      9,099

         Additions                       34,901        18,351       107,466            -      1,555           92      1,350

         Transfers                      107,302        (9,257)      (97,665)        (380)

         Disposals                                                                             (939)                   (115)
                                        -------       -------       -------        -----      -----        -----     ------

         Balance at end of year         916,565       243,651       138,939        7,760      5,598        7,245     10,334
                                        -------       -------       -------        -----      -----        -----     ------

         Accumulated depreciation

         Balance at beginning
          of year                       271,142                                    6,841      2,260        6,219      5,967

         Additions                       19,131                                        1        739          309        773

         Disposals                                                                             (564)                   (107)
                                        -------       -------       -------        -----      -----        -----     ------

         Balance at end of year         290,273                                    6,842      2,435        6,528      6,633
                                        -------       -------       -------        -----      -----        -----     ------

         Depreciated cost
          as at December 31, 1997       626,292       243,651       138,939          918      3,163          717      3,701
                                        -------       -------       -------        -----      -----        -----     ------
                                        -------       -------       -------        -----      -----        -----     ------

         Depreciated cost
          as at December 31, 1996       503,220       248,787       114,908        1,299      2,722          934      3,132
                                        -------       -------       -------        -----      -----        -----     ------
                                        -------       -------       -------        -----      -----        -----     ------

                                       26



<PAGE>

                                              Total        Total




                                        December 31  December 31
                                               1997         1996
                                        -----------  -----------
  Cost

         Balance at beginning
          of year                        1,167,431    1,031,348

         Additions                         163,715      136,440

         Transfers

         Disposals                          (1,054)      (1,808)
                                         ---------    ---------

         Balance at end of year          1,330,092    1,165,980
                                         ---------    ---------

         Accumulated depreciation

         Balance at beginning
          of year                          292,429      273,445

         Additions                          20,953       18,728

         Disposals                            (671)      (1,195)
                                         ---------    ---------

         Balance at end of year            312,711      290,978
                                         ---------    ---------

         Depreciated cost
          as at December 31, 1997        1,017,381
                                         ---------
                                         ---------
         Depreciated cost
          as at December 31, 1996                       875,002
                                                       --------
                                                       --------

</TABLE>

                                     26

<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 11 - Fixed Assets (cont'd)

         A.       Consolidated balance sheet: (cont'd)

         (1)      Including rights in land aggregating NIS 369,502 thousand. The
                  land is, for the most part, registered in the names of the
                  Company and the subsidiaries. Part of the land, of an adjusted
                  cost of NIS 189,307 thousand, is freehold land of the Company
                  and the subsidiaries. Another part, of an adjusted cost of NIS
                  180,195 thousand, is leasehold land, leased by subsidiaries
                  (of which NIS 5,222 noncapitalized lease). The lease is for
                  various periods up to 2042, with the option for extension for
                  another 49 years. Part of the land has not yet been registered
                  in the names of the companies, mainly because the land
                  ownership rights have not yet been formalized in certain areas
                  where some of the property is located.

         (2)      Including land amounting to NIS 2,177 thousands in respect of
                  which the Residential Building Commission approved a plan to
                  rezone the land from agricultural land to land for residential
                  and commercial purposes.

         (3)      Including land amounting to NIS 14,261 thousands

         (4)      The plantations are on land area totalling 334 dunams
                  (freehold land - 97 dunams, leasehold land - 237 dunams,
                  leased until the year 2062 and thereafter).


                                       27

<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 11 - Fixed Assets (cont'd)

B.    Company balance sheet

<TABLE>
<CAPTION>

                                     Building      Buildings       Vehicles          Other          Total           Total
                                   Leased out          under                        assets
                                   and office   construction
                                     premises
                                                                                              December 31     December 31
                                          (1)            (2)                                         1997            1996
                                   ----------   ------------      ---------         ------    -----------     -----------
<S>                                    <C>            <C>              <C>              <C>           <C>             <C>
Cost

Balance at beginning of year          34,773         14,230            775            844         50,622          50,688

Additions                                903             31                            69          1,003             156

Disposals                                                                                                           (222)
                                      ------         ------        -------          -----         ------          ------

Balance at end of year                35,676         14,261            775            913         51,625          50,622
                                     -------        -------        -------          -----         ------          ------
                                     -------        -------        -------          -----         ------          ------


Accumulated depreciation

Balance at beginning of year          20,068                           423            241         20,732          19,707

Additions                                748                           100             92            940           1,235

Disposals                                                                                                           (210)
                                     -------        -------        -------          -----         ------          ------


Balance at end of year                20,816                           523            333         21,672          20,732
                                     -------        -------        -------          -----         ------          ------

Depreciated cost as at
 December 31, 1997                    14,860         14,261            252            580         29,953
                                     -------        -------        -------          -----         ------
                                     -------        -------        -------          -----         ------

Depreciated cost as at
 December 31, 1996                    14,705         14,230            352            603                         29,890
                                      ------         ------         ------          -----                        -------
                                      ------         ------         ------          -----                        -------

</TABLE>

(1) Includes rights in land amounting to NIS 8,391.

(2) Land on which an office building is being constructed in a combination
    transaction.


                                       28
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 11 - Fixed Assets (cont'd)

         C.       Rates of depreciation

<TABLE>
<CAPTION>

                                                                                                                     %
                                                                                                                   ----
<S>                                                                                                                <C>


         Buildings                                                                                                  2-4
         Plantations and irrigation plants                                                                        15-20
         Vehicles                                                                                                    15
         Machinery and equipment                                                                                  10-20
         Other assets                                                                                              6-33
</TABLE>



Note 12 - Deferred Charges and Other Assets

<TABLE>
<CAPTION>
                                                            Cost        Accumulated
                                                                       amortization                       Amortized cost
                                                    ------------       ------------       ------------------------------
                                                     December 31        December 31        December 31       December 31
                                                            1997               1997               1997              1996
                                                    ------------       ------------       ------------    --------------
<S>                                                        <C>                <C>                <C>                <C>
         A.       Consolidated

         Deferred charges -
         Capital raising expenses                        17,877              7,405             10,472             6,116

         Taxes in connection with
          unrealized profits from
          real estate transactions                        2,734              1,228              1,506             2,374
                                                    ------------       ------------       ------------    --------------

         Deferred charges                                20,611              8,633             11,978             8,490
                                                    ------------       ------------       ------------    --------------

         Other assets - initial difference                5,782                868              4,914             5,496

         Deferred taxes for timing
          differences                                                                           7,331                20
                                                    ------------       ------------       ------------    --------------

                                                          5,782                868             12,245             5,516
                                                    ------------       ------------       ------------    --------------
                                                    ------------       ------------       ------------    --------------

                                                         26,393              9,501             24,223            14,006
                                                    ------------       ------------       ------------    --------------
                                                    ------------       ------------       ------------    --------------
         B.       The Company

         Deferred charges -
         Taxes in connection with
          unrealized profits from
          real estate transactions                          676                299                377               405
                                                    ------------       ------------       ------------    --------------
                                                    ------------       ------------       ------------    --------------
</TABLE>
                                       29

<PAGE>
                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------

Note 13 - Advances from Purchasers of Apartments and Others, Net

<TABLE>
<CAPTION>
                                                                       Consolidated                          The Company
                                                    --------------------------------       ------------------------------
                                                     December 31        December 31        December 31       December 31
                                                            1997               1996               1997              1996
                                                     ------------       ------------       ------------    --------------
<S>                                                      <C>              <C>                   <C>                  <C>
         Advances                                        39,865             31,062              9,018            28,434
                                                    ------------       ------------       ------------    --------------

         Less - land                                     13,200              2,225              2,897             2,226

                construction work                        22,665             16,995              5,147            16,093
                                                    ------------       ------------       ------------    --------------

                                                         35,865             19,220              8,044            18,319
                                                    ------------       ------------       ------------    --------------

                                                          4,000             11,842                974            10,115
                                                    ------------       ------------       ------------    --------------
                                                    ------------       ------------       ------------    --------------
</TABLE>

Note 14 - Credit from Banking Entities

<TABLE>
<CAPTION>
                                                                           Consolidated                      The Company
                                              Terms of     ----------------------------      ---------------------------
                                           linkage and      December 31     December 31      December 31     December 31
                                              interest             1997            1996             1997            1996
                                           ----------       -----------    ------------      -----------     -----------
<S>                                        <C>              <C>            <C>               <C>             <C>
         Overdraft                          Prime + 1%           9,677             491                              373

         Import financing                 German marks           2,763           2,622

         Short-term loans                13.8% - 15.2%          12,755           9,995
                                                           -----------    ------------      -----------     -----------

                                                                25,195          13,108                              373
                                                           -----------    ------------      -----------     -----------
                                                           -----------    ------------      -----------     -----------
</TABLE>

Note 15 - Suppliers and Subcontractors

<TABLE>
<CAPTION>
                                                                                                            Consolidated
                                                                                             ---------------------------
                                                                                               December 31   December 31
                                                                                                      1997          1996
                                                                                             -------------   -----------
<S>                                                                                             <C>                <C>

         Current accounts                                                                         5,623           7,888

         Checks and notes payable                                                                 3,502           2,329
                                                                                             -------------   -----------

                                                                                                  9,125          10,217
                                                                                             -------------   -----------
                                                                                             -------------   -----------
</TABLE>
                                       30
<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 16 - Creditors and Credit Balances

<TABLE>
<CAPTION>

                                                                       Consolidated                          The Company
                                                     ------------------------------        -----------------------------
                                                     December 31        December 31        December 31       December 31
                                                            1997               1996               1997              1996
                                                     -----------       ------------        -----------       -----------
<S>                                                      <C>                <C>                   <C>              <C>

         Sellers of land                                    545             13,600

         Income received in advance                       3,530              2,354                                   76

         Employees and other liabilities
          related to salaries                             4,115              4,228              1,569             1,373

         Withholdings and taxes
          Remittable                                     19,517             12,351              6,895             2,294

         Subsidiary current account*                                                           18,158            41,889

         Provision for completion of
          construction                                   13,255             23,504

         Liability relating to
          appreciation tax and
          consent fees                                    9,498              9,370

         Expenses payable                                15,167              8,117              4,186             1,104

         Others                                           5,405              4,254                941                67
                                                     -----------       ------------        -----------       -----------

                                                         57,777             54,274             31,749            46,803
                                                     -----------       ------------        -----------       -----------
                                                     -----------       ------------        -----------       -----------
</TABLE>


      * Bear annual interest at rates of 2% (1996 - bear annual
        interest at prime rate).


Note 17 - Deferred Taxes

<TABLE>
<CAPTION>

                                 In respect of     In respect of       Other timing            Total               Total
                                   depreciable          building        differences
                                 fixed assets          projects                           December 31,      December 31,
                                                   less advances                                  1997              1996
                                 -------------     -------------       ------------      -------------      ------------
<S>                                   <C>                   <C>             <C>               <C>                 <C>

         a.  Consolidated

         Balance as at
          beginning of
          year                         (7,414)          (26,817)             7,065            (27,166)          (23,021)

         Changes                         (482)           15,529              2,644             17,691            (4,145)
                                 -------------     -------------       ------------      -------------      ------------

         Balance as at
          end of year                  (7,896)          (11,288)             9,709             (9,475)          (27,166)
                                -------------     -------------       ------------      -------------      ------------
                                -------------     -------------       ------------      -------------      ------------

         b.  The Company

         Balance as at
          beginning of
          year                            (28)                               3,445              3,417             1,766

         Changes                           47            (1,255)              (330)            (1,538)            1,651
                                 -------------     -------------       ------------      -------------      ------------

         Balance as at
          end of year                      19            (1,255)             3,115              1,879             3,417
                                 -------------     -------------       ------------      -------------      ------------
                                 -------------     -------------       ------------      -------------      ------------

</TABLE>

                                       31

<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 17 - Deferred Taxes (cont'd)

         2.     The deferred taxes are stated as follows:

<TABLE>
<CAPTION>

                                                                       Consolidated                          The Company
                                                    -------------------------------       ------------------------------
                                                     December 31        December 31        December 31       December 31
                                                            1997               1996               1997              1996
                                                    ---------------   -------------       ---------------   ------------
<S>                                                      <C>                <C>               <C>                <C>

         Under current assets                             5,098              5,180              3,115             3,445

         Under other assets                               7,331                  21

         Under current liabilities                       (2,161)           (14,880)               (45)

         Under long-term liabilities                    (19,743)           (17,487)            (1,191)              (28)
                                                    ---------------   -------------       ---------------   ------------

                                                         (9,475)           (27,166)             1,879              3,417
                                                    ---------------   -------------       ---------------   ------------
                                                    ---------------   -------------       ---------------   ------------

</TABLE>


Note 18 - Long-term Liabilities

         A.     Composition:

<TABLE>
<CAPTION>

                                                                                          Consolidated      Consolidated
                                                    --------------------------------------------------     -------------
                                                                                     December 31, 1997              1996
                                                    --------------------------------------------------     -------------
                                                           Total            Current            Balance           Balance
                                                                         maturities
                                                    ---------------     -------------      -----------        ----------
<S>                                                         <C>             <C>                <C>                  <C>

         Debentures convertible to
          shares (1)                                    235,810              7,261            228,549            52,433

         Debentures (2)                                  41,120              5,233             35,897            40,617

         Liabilities to banks (3)                        96,309              4,301             92,008            88,234

         Liabilities to provident funds (4)             138,859             24,931            113,928           137,343

         Other liabilities (5)                           60,975              2,422             58,533            63,618
                                                    ------------      -------------       ------------      ------------

                                                        573,073             44,138            528,935           382,245
                                                    ------------      -------------       ------------      ------------
                                                    ------------      -------------       ------------      ------------

</TABLE>


         (1)      Debentures convertible into shares

         (a)      Convertible debentures, with a balance, as at balance sheet
                  date, of NIS 49,008 thousand were issued by Hadarim Properties
                  Ltd. (a subsidiary) per a prospectus published on February 28,
                  1997.

                  The debentures bear interest at the rate of 3.5% p.a. Both
                  principal and interest are linked to the CPI published for
                  February 1997, and they are redeemable on February 28 of each
                  year from 1998 to 2005. The debentures can be converted into
                  shares on any business day, beginning with the day they are
                  registered for trading and until February 8, 2001 at the
                  conversion price of NIS 80 par value of debentures per each
                  ordinary share of a par value of NIS 1. After February 8,
                  2001 the debentures will no longer be convertible.


                                       32
<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 18 - Long-term Liabilities (cont'd)

                  The market value of the debentures as at December is NIS
                  53,238 thousand.

                  The debentures are secured by a fixed charge on a token
                  deposit which was deposited with the trustee of the
                  debentures. The subsidiary is free to pledge its assets
                  without limitation as to amount and degree, including the
                  registering of charges on additional debenture series, without
                  the necessity of obtaining the consent of the trustee.

          (b)     Non marketable convertible debentures, with a balance, as at
                  balance sheet date, of NIS 50,626 thousand were issued by
                  Hadarim Properties Ltd. (a subsidiary) per a prospectus
                  published on August 31, 1997.

                  The debentures bear interest at the rate of 2.5% p.a.. Both
                  principal and interest are linked to the CPI published for
                  July 1997, and they are redeemable on August 31 of each year
                  from 2001 to 2004. The debentures can be converted into shares
                  on any business day, beginning with the day they are
                  registered for trading and until August 12, 2001 at the
                  conversion price of NIS 130 par value of debentures per each
                  ordinary share of a par value of NIS 1. After August 12, 2001
                  the debentures will no longer be convertible.

                  The debentures are secured by a fixed charge on a token
                  deposit which was deposited with the trustee of the
                  debentures. The subsidiary is free to pledge its assets
                  without limitation as to amount and degree, including the
                  registering of charges on additional debenture series, without
                  the necessity of obtaining the consent of the trustee.

         (c)      Marketable convertible debentures, with a balance, as at
                  balance sheet date, of NIS 131,115 thousand were issued by
                  Bayside Land Corporation (a subsidiary) per a prospectus
                  published on September 24, 1997.

                  The debentures bear interest at the rate of 2.5% p.a.. Both
                  principal and interest are linked to the CPI published for
                  September 1997, and they are redeemable on September 20 of
                  each year from 2000 to 2006. The debentures can be converted
                  into shares on any business day, beginning October 1, 1997 and
                  until August 31, 2001 at the conversion price of NIS 885 par
                  value of debentures per each ordinary share of a par value of
                  NIS 1. After August 31, 1997 the debentures will no longer be
                  convertible.

                  The market value of the debentures as at December is NIS
                  117,005 thousand.

                  The debentures are secured by a fixed charge on a token
                  deposit which was deposited with the trustee of the
                  debentures. The subsidiary is free to pledge its assets
                  without limitation as to amount and degree, including the
                  registering of charges on additional debenture series, without
                  the necessity of obtaining the consent of the trustee.


                                       33


<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 18 - Long-term Liabilities (cont'd)

         A.       Composition: (cont'd)

         (2)      Debentures

         Composition:

<TABLE>
<CAPTION>

                                                                                                            Consolidated
                                                                                           -----------------------------
                                                                                           December 31       December 31
                                                                                                  1997              1996
                                                                                           -----------      ------------
<S>                                                                                          <C>                  <C>


         Total debentures                                                                      41,120            48,706

         Current maturities                                                                     5,223             8,089
                                                                                                -----             -----

                                                                                               35,897            40,617
                                                                                               ------            ------
                                                                                               ------            ------

</TABLE>


         Series B

         Marketable debentures, the balance of which as at the balance sheet
         date was NIS 41,787 thousand were issued by the Property and Building
         (Finance 1986) Limited (subsidiary) per the prospectus published on
         July 29, 1990. The debentures bear interest at the rate of 1.85% per
         annum and are linked (principal and interest) to the consumer price
         index. The redemption dates are in the years 1997 - 2002. The
         debentures were issued to the public at a price of NIS 90 for every NIS
         100 nominal value of debenture. The market value of debentures at
         December 31, 1997 is NIS 47,011 thousands.

         Series - 6 and 7

         Debentures from these series were issued in the past by the Property
         and Building Corporation Limited, and transferred to Property and
         Building (Finance 1986) Limited (subsidiary) under the framework of a
         reorganization between the companies which was approved by the court,
         effective from July 1, 1987. The balance of the outstanding debentures
         was fully redeemed in 1997 together with the long-term deposits whose
         source was the proceeds from the issue of the debentures. These
         debentures bear interest at the rate of 5% per annum and are linked
         (principle and interest) to the consumer price index.

         Guarantees

         Debentures from Series B are secured by way of an equal first floating
         charge on all assets of the subsidiary company. The Company has
         guaranteed the full redemption of all the debentures issued and has
         undertaken not to create in the future any lien on its assets so long
         as the series B debentures are not fully redeemed.

         Assurance of regular trading of debentures - See Note 20C(1).

                                       34


<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 18 - Long-term Liabilities (cont'd)

         A.    Composition: (cont'd)

         (3)   Liabilities to banks

<TABLE>
<CAPTION>

                                      Interest                                             December 31       December 31
                                          rate                              Current               1997              1996
                                     ---------             Total         maturities      -------------      ------------
                                             %                                                 Balance           Balance
                                     ---------          --------         ----------      -------------      ------------
<S>                                   <C>               <C>              <C>               <C>                <C>

         Consolidated
          balance sheet             4.7 - 4.95            96,309              4,301             92,008            88,234
                                                          ------             ------             ------            ------
                                                          ------             ------             ------            ------

         Company
          balance sheet                   5.75               377                377                                  372
                                                          ------             ------             ------            ------
                                                          ------             ------             ------            ------



         (4)      Liabilities to provident funds


         Consolidated
          balance sheet                   4.9            138,859             24,931            113,928           137,343
                                                          ------             ------             ------            ------
                                                          ------             ------             ------            ------

</TABLE>


         The liabilities at (3) and (4) are linked to the consumer price index.


         (5)      Other long-term liabilities

<TABLE>
<CAPTION>

                                      Interest                                             December 31       December 31
                                          rate                              Current               1997              1996
                                     ---------             Total         maturities      -------------      ------------
                                             %                                                 Balance           Balance
                                     ---------          --------         ----------      -------------      ------------
<S>                                   <C>               <C>              <C>               <C>                <C>

         Consolidated
          balance sheet
         Liabilities for
         construction(1)                                  60,975              2,422             58,553            63,618
                                                          ------             ------             ------            ------
                                                          ------             ------             ------            ------


         Company balance sheet



         Subsidiary
          company (2)                     4.0             10,125              2,025              8,100
                                                          ------             ------             ------
                                                          ------             ------             ------


</TABLE>


         (1)  The liability is non-interest bearing and is linked to the
              construction input index (pertaining to an amount of NIS 52,220
              - see also Note
20C(5).

         (2)  The loan is linked to the consumer price index.

                                       35

<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 18 - Long-term Liabilities (cont'd)

        B.     Classification of long-term liabilities by years of maturity

<TABLE>
<CAPTION>

                                                                       Consolidated                          The Company
                                                     ------------------------------        -----------------------------
                                                     December 31        December 31        December 31       December 31
                                                            1997               1996               1997              1996
                                                     -----------        -----------        -----------       -----------
<S>                                                     <C>               <C>                 <C>              <C>
         Within 12 months -
          current maturities                              44,138             50,840              2,402             8,944
                                                          ------             ------             ------            ------
                                                          ------             ------             ------            ------

         During second year                               48,008             36,661              2,025               372

         During third year                               131,281             39,100              2,025

         During fourth year                               79,395            126,961              2,025

         During fifth year                                75,469             39,100              2,025

         Beyond fifth year till 2005                     136,229             76,805

         Without redemption date*                         58,553             63,618
                                                          ------             ------

                                                         528,935            382,245               8,100               372
                                                         -------            -------             -------             -----
                                                         -------            -------             -------             -----

</TABLE>


         *        Liabilities pertaining to construction and land sellers.


Note 19 - Liability For Employee Severance Benefits, net

         A.       The commitments in respect of employee severance pay of the
                  Company and of its subsidiaries are fully covered by deposits
                  with severance pay funds, profits and linkage increments
                  accrued thereon, insurance policies and provisions. With
                  respect to the major part of the above-mentioned sums, the
                  Group companies have no rights of withdrawal.

         B.       Composition


<TABLE>
<CAPTION>

                                                                       Consolidated                          The Company
                                                     ------------------------------        -----------------------------
                                                     December 31        December 31        December 31       December 31
                                                            1997               1996               1997              1996
                                                     -----------        -----------        -----------       -----------
<S>                                                      <C>                <C>                   <C>              <C>
                  Liability in respect of
                   employee severance*                    7,498               8,155                 36               396

                  Less - amounts funded*                  5,136               5,767                436               395
                                                          -----               -----                ---               ---

                                                          2,362               2,388                  -                 1
                                                          -----               -----                ---               ---
                                                          -----               -----                ---               ---
</TABLE>


         *        Not including the surrender values of insurance policies
                  for severance pay.

         C.       A wholly-owned subsidiary is committed to a retirement
                  arrangement with a widow of an ex-general manager of the
                  subsidiary. Based on an independent actuary's opinion, a
                  liability amounting to NIS 2.3 million (December 31, 1996 -
                  NIS 2.2 million) is included in the balance sheet.

                                       36


<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------



Note 20 - Contingent Liabilities and Commitments

        A.     Contingent liabilities


<TABLE>
<CAPTION>

                                                                       Consolidated                          The Company
                                                     ------------------------------        -----------------------------
                                                     December 31        December 31        December 31       December 31
                                                            1997               1996               1997              1996
                                                     -----------        -----------        -----------       -----------
<S>                                                    <C>                <C>                <C>               <C>
        1.     Guarantees Granted

        (a)    In respect of dwelling
                purchase insurance                           265                265                265               265

        (b)    On behalf of subsidiaries
                in respect of -
               Performance guarantees                                                              207
               Debentures                                                                       41,787            49,477

</TABLE>


        The guarantees are linked mainly to the consumer price index and partly
        to the construction inputs index.

        2.     An appeal has been lodged with the Supreme Court against a
               District Court judgement which had rejected a claim against the
               Company and its subsidiary, Naveh Building and Development
               Co.Ltd., for brokerage fees of NIS 7 million in respect of the
               "Marom Naveh" real estate transaction. In the opinion of legal
               counsel, considering the determination of the District Court,
               the chances of the success of the appeal are negligible.
               Therefore, no provision in respect of this appeal has been
               included in the financial statement.

        3.     Claims have been filed against the Company and subsidiaries, in
               the regular course of business, by apartment purchases, alleging
               building defects and/or late delivery. There are also 2 claims
               for agents' fees. The Company and the subsidiaries do not make
               any provisions for repairs and warranties, since the agreement
               with the executing contractors provide for the contractors to
               indemnify them in respect of such claims.

        4.     A legal suit has been filed against a subsidiary regarding the
               distribution of the profit from a project which was executed in
               the years 1981-1985. The plaintiff contends that a partnership,
               with which the Company had an agreement, is entitled to receive a
               share in the profits in a cumulative amount of NIS 7,582 thousand
               as at balance sheet date. The plaintiff, who claims that he is
               entitled to one half of the profits of the partnership, is
               demanding that the said subsidiary pay him NIS 3,690 plus legal
               costs connected with the claim and interest and linkage
               increments. The subsidiary has filed a statement of defense
               against the said claim in which it denies the facts stated in the
               statement of claim. The subsidiary has made no provision in its
               books in respect thereto.

                                       37
<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 20 - Contingent Liabilities and Commitments (cont'd)

         B.       Liens

         (1)      A subsidiary has pledged real estate purchased in 1996 as well
                  as the assets and anticipated receipts of a project in favor
                  of a bank (an interested party) in respect of the financing
                  accompaniment to the project.

         (2)      Another subsidiary has rights in land in favor of banks to
                  secure loans received to finance its acquisition. The Company
                  has also given a dollar linked promissory note in the amount
                  of NIS 2.9 million as security as well as a bank guarantee in
                  the amount of NIS 0.58 million linked to the dollar to secure
                  the performance of its undertaking towards the Israel Lands
                  Administration to develop the area.

         C.       Commitments

         1.       Under the terms of a prospectus for the issue of debentures
                  (series "B") by a subsidiary as stated in Note 18A.(2) the
                  Company supplied a bank with debentures out of the
                  aforementioned issue, in an amount of NIS 375,000 N.V. and
                  cash of NIS 337,500 linked with terms identical to those of
                  the debentures. The debentures and cash held by the bank will
                  be used to ensure regular trading at the stock exchange and
                  will be reduced proportionately to the repayment of the
                  debentures. As at December 31, 1997, balances held by the
                  bank, per the above arrangement, amounted to NIS 290,400
                  (nominal value) in debentures and NIS 714,000 in cash
                  (including short-term deposits) (December 31, 1996 - NIS
                  314,475 nominal value and NIS 867,000, in cash).

         2.       There are commitments of the Company and subsidiaries in
                  respect of the purchase of real estate, residential
                  construction, and development and construction of building
                  estimated as at balance sheet date at an approximate amount of
                  NIS 225 million.

         3.       A subsidiary leased part of a building to the Government of
                  Israel for a term of 15 years, from the year 1992, with a
                  right, of the lessee, to shorten the term to 12 years. Annual
                  lease payments amount to approximately NIS 3,800 thousand.

         4.       The Company has signed an agreement with a subsidiary
                  according to which the subsidiary will manage a construction
                  project for the Company, and will receive a management fee at
                  a given rate of the sales proceeds. During the current year,
                  approximately NIS 1,018 thousand (1996 - NIS 609 thousand) was
                  paid.

         5.       During 1995, a subsidiary purchased 72% of the rights in 72
                  dunams of land at a price of approximately NIS 52.2 million
                  that will be paid by way of construction services.

                                       38


<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 21 - Income from Construction and Other Sources


<TABLE>
<CAPTION>

                                                                                          Consolidated      The Company
                                                     -------------------------------------------------       -----------
                                                     Year Ended         Year Ended          Year Ended        Year Ended
                                                     December 31        December 31        December 31       December 31
                                                            1997               1996               1995              1997
                                                     -----------        -----------        -----------       -----------
<S>                                                    <C>                <C>                <C>               <C>
        Apartments, stores and land                      238,883            196,144            197,334            53,163
        Air-conditioning systems and
         others                                           29,056             32,746             36,629
        Citrus crop                                        1,027              1,180              1,579
                                                        --------           --------           --------          --------

                                                         268,966            230,070            235,542            53,163
                                                        --------           --------           --------          --------
                                                        --------           --------           --------          --------
</TABLE>


Note 22 - The Company's Equity in the Net Earnings of Investee Companies

<TABLE>


                                                               Consolidated                                   The Company
                                 ------------------------------------------    ------------------------------------------
                                   Year ended     Year ended     Year ended     Year ended     Year ended      Year ended
                                  December 31    December 31    December 31    December 31    December 31     December 31
                                         1997           1996           1995           1997           1996            1995
                                 ------------   ------------   ------------   ------------   ------------    ------------
<S>                                <C>            <C>            <C>            <C>            <C>             <C>
         The Company's
          equity net, in the
          earnings of
          investee
          companies                     7,203         13,188        *13,389         61,293         63,954          60,852

         Portion of initial
          difference
          amortized                      (653)          (495)          (476)        (1,125)         (334)           (411)
                                        -----         ------         ------         ------         ------         ------

                                        6,550         12,693         12,913         60,168         63,620          60,441
                                        -----         ------         ------         ------         ------          ------
         Includes dividend
          received                      7,857          8,149          9,338         16,794         12,761          11,172
                                        -----         ------         ------         ------         ------          ------
                                        -----         ------         ------         ------         ------          ------

</TABLE>

         * In the past, the Company's equity in the earnings and in the net
         asset value of two affiliates was based on financial statements of the
         affiliates with a time lag of six months. Beginning with the Company's
         financial statements of September 30, 1996 the net asset value data of
         the affiliates is based on their up-to-date financial statements. As a
         result of the elimination of the time lag, the Company's equity in the
         earnings of affiliates increased by NIS 2,199 thousand.



<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 23 - Income from Investments and Fixed Assets

<TABLE>
<CAPTION>
                                                               Consolidated                                   The Company
                                 ------------------------------------------    ------------------------------------------
                                   Year ended     Year ended     Year ended     Year ended     Year ended      Year ended
                                  December 31    December 31    December 31    December 31    December 31     December 31
                                         1997           1996           1995           1997           1996            1995
                                 ------------    -----------    -----------    -----------    -----------     -----------
        <S>                      <C>             <C>            <C>            <C>            <C>             <C>
         Gains on
          realization of
          investments in
          investee
          companies                   10,153             53             62            603             53              62
         Gains on sale
          of fixed
          assets and land                (40)         2,789          6,586                            21              54
                                 ------------    -----------    -----------    -----------    -----------     -----------
                                      10,113          2,842          6,648            603             74             116
                                 ------------    -----------    -----------    -----------    -----------     -----------
                                 ------------    -----------    -----------    -----------    -----------     -----------

</TABLE>

Note 24 - Income from Securities, Financing and Other Income

<TABLE>
<CAPTION>

                                                               Consolidated                                   The Company
                                  -----------------------------------------    ------------------------------------------
                                   Year ended     Year ended     Year ended     Year ended     Year ended      Year ended
                                  December 31    December 31    December 31    December 31    December 31     December 31
                                         1997           1996           1995           1997           1996            1995
                                  -----------    -----------    -----------    -----------    -----------     -----------
<S>                              <C>           <C>            <C>             <C>            <C>             <C>

   Gains relating to
    marketable
    securities -
   Appreciation
    in value                            3,188          1,197            425             25             23

   Interest from
    securities                          1,771          1,029          1,450             14             14
                                  -----------    -----------    -----------    -----------    -----------
                                        4,959          2,226          1,875             39             37
   Interest -
    From banks
     and others                         4,546          3,036          2,754             59                             37
    From investee
     companies                                                                           3            750             674
   Management
    fees                                1,538          1,499          2,080          1,948          1,695           1,621
   Other income                           738            161          1,337
                                  -----------    -----------    -----------    -----------    -----------     -----------
                                       11,781          6,922          8,046          2,049          2,482           2,332
                                  -----------    -----------    -----------    -----------    -----------     -----------
                                  -----------    -----------    -----------    -----------    -----------     -----------

</TABLE>

                                       40

<PAGE>
                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------

Note 25 - Construction and Other Costs

<TABLE>
<CAPTION>
                                                                               Consolidated         The Company
                                            -----------------------------------------------         -----------
                                             Year ended         Year ended       Year ended          Year ended
                                            December 31        December 31      December 31         December 31
                                                   1997               1996             1995                1997
                                            -----------        -----------      -----------         -----------
<S>                                         <C>                <C>              <C>                 <C>
 Apartments, shops and land -

 Construction expenses                         129,615            103,214           131,922              33,952
 Land                                           34,120             21,388            16,247               5,801
 Change in inventories of
  apartment and shops                            4,847              5,654            (6,177)             (1,325)
                                            -----------        -----------      -----------         -----------
                                               168,582            130,256           141,992              38,428
                                            -----------        -----------      -----------         -----------
 Air conditioning systems and others -
 Materials and installation*                    25,891             26,551            32,899
 Change in inventories of
  air-conditioning and other equipment               2              3,594            (1,270)
                                            -----------        -----------      -----------
                                                25,893             30,145            31,629
                                            -----------        -----------      -----------
 Citrus crops -
 Cultivating and picking expenses                1,268              1,214             1,251
                                            -----------        -----------      -----------         -----------
                                               195,743            161,615           174,872              38,428
                                            -----------        -----------      -----------         -----------
                                            -----------        -----------      -----------         -----------
 *  Including depreciation                         676                556               575
                                            -----------        -----------      -----------
                                            -----------        -----------      -----------
</TABLE>

Note 26 - Administrative and General Expenses

<TABLE>
<CAPTION>
                                                               Consolidated                                   The Company
                                  -----------------------------------------    ------------------------------------------
                                   Year ended     Year ended     Year ended     Year ended     Year ended      Year ended
                                  December 31    December 31    December 31    December 31    December 31     December 31
                                         1997           1996           1995           1997           1996            1995
                                  -----------    -----------    -----------    -----------    -----------     -----------
<S>                               <C>            <C>            <C>            <C>            <C>             <C>
    Salaries and related
     expenses                          21,607         22,203         20,444          5,300          5,522           5,038
    Directors' fees                       875            961            926            267            297             298
    Professional services               2,772          2,432          2,835            273            176             262
    Office maintenance                  3,193          2,935          3,354            929            899           1,020
    Other                               3,775          2,880          2,919            914            412             514
                                  -----------    -----------    -----------    -----------    -----------     -----------
                                       32,222         31,411         30,478          7,683          7,306           7,132
                                  -----------    -----------    -----------    -----------    -----------     -----------
    Less -
    Directors fees
     received from
     affiliated companies                (157)          (312)          (273)
    Participation in
     expenses by a
     subsidiary                                                                       (476)          (472)           (468)
                                  -----------    -----------    -----------    -----------    -----------     -----------
                                       32,065         31,099         30,205          7,207          6,834           6,664
                                  -----------    -----------    -----------    -----------    -----------     -----------
                                  -----------    -----------    -----------    -----------    -----------     -----------
</TABLE>
                                       41
<PAGE>
                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------

Note 27 - Selling and Marketing

<TABLE>
<CAPTION>
                                                                     Consolidated   The Company
                                      -------------------------------------------   -----------
                                        Year ended      Year ended     Year ended    Year ended
                                       December 31     December 31    December 31   December 31
                                              1997            1996           1995          1997
                                       -----------     -----------    -----------   -----------
<S>                                     <C>             <C>            <C>           <C>
Salaries and related expenses                1,562           1,327          1,317
Advertising and others                       3,433           2,490          2,047           877
                                       -----------     -----------    -----------   -----------
                                             4,995           3,817          3,364           877
                                       -----------     -----------    -----------   -----------
                                       -----------     -----------    -----------   -----------
</TABLE>

Note 28 - Depreciation and Amortization

<TABLE>
<CAPTION>
                                                               Consolidated                                   The Company
                                  -----------------------------------------    ------------------------------------------
                                   Year ended     Year ended     Year ended     Year ended     Year ended      Year ended
                                  December 31    December 31    December 31    December 31    December 31     December 31
                                         1997           1996           1995           1997           1996            1995
                                  -----------    -----------    -----------    -----------    -----------     -----------
<S>                               <C>            <C>            <C>            <C>            <C>             <C>
      Depreciation                     20,277         18,172         16,440            940          1,234           1,216
      Amortization                      2,236          1,689          1,616             27             28              28
                                  -----------    -----------    -----------    -----------    -----------     -----------
                                       22,513         19,861         18,056            967          1,262           1,244
                                  -----------    -----------    -----------    -----------    -----------     -----------
                                  -----------    -----------    -----------    -----------    -----------     -----------
</TABLE>

Note 29 - Financing Expenses

<TABLE>
<CAPTION>
                                                               Consolidated                                   The Company
                                  -----------------------------------------    ------------------------------------------
                                   Year ended     Year ended     Year ended     Year ended     Year ended      Year ended
                                  December 31    December 31    December 31    December 31    December 31     December 31
                                         1997           1996           1995           1997           1996            1995
                                  -----------    -----------    -----------    -----------    -----------     -----------
<S>                               <C>            <C>            <C>            <C>            <C>             <C>
   To investee
    companies                                                                        1,083          3,104           2,813
   In respect of
    debentures                          7,795          4,045          1,261
   To banks and
    others                             16,275         12,428          3,815                            19
   To income tax
    authority                               4              7
                                  -----------    -----------    -----------    -----------    -----------     -----------
                                       24,074         16,480          5,076          1,083          3,123           2,813
   Decrease in value
    of securities                                                                                                      36
   Interest on
    securities                                                                                                        (15)
                                                                                                              -----------
                                                                                                                       21
                                                                                                              -----------
                                       24,074         16,480          5,076          1,083          3,123           2,834
                                  -----------    -----------    -----------    -----------    -----------     -----------
                                  -----------    -----------    -----------    -----------    -----------     -----------
</TABLE>
                                       42
<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 30 - Taxes on Income



    A.   Tax under inflationary conditions

         The Income Tax Law (Adjustments for Inflation) - 1985, effective
         beginning with the 1985 tax year, put into practice measurements of the
         results for tax purposes, on a (non-inflationary) basis. The various
         adjustments required by the above Law are intended to result in the
         taxation based on the real income. This notwithstanding, the adjustment
         of the nominal profit according to the tax laws does not always equal
         the adjustment for inflation according to the opinions of the Institute
         of Certified Public Accountants in Israel. As a result there are
         differences between the adjusted profit per the financial statements
         and the adjusted profit for tax purposes.

    B.   Carryforward to coming years of losses and deductions for tax purposes

         Carryforward losses to coming years for tax purposes in subsidiary
         companies, adjusted for inflation are in the amount of NIS 17,486
         thousand as at balance sheet date (December 31, 1996 - NIS 18,925
         thousand). Losses from securities that are deductible in the future
         years against a real income from marketable securities amount to an
         adjusted amount of NIS 15,021 thousand at balance sheet date. (December
         31, 1996 - NIS 17,065)

         Deductions for inflation of subsidiaries carried forward are in the
         amount of NIS 33,217 thousand (December 31, 1996 - NIS 33,423
         thousand).

         The balances of carryforward losses and the deduction for inflation are
         carried forward linked to the changes in the consumer price index as
         per the Law mentioned in A above. No deferred taxes have been created
         in respect of these carryforwards, with the exception of NIS 7,700
         thousand for which deferred taxes were created.

    C.   Composition:


<TABLE>
<CAPTION>

                                                               Consolidated                                   The Company
                                  -----------------------------------------    ------------------------------------------
                                   Year ended     Year ended     Year ended     Year ended     Year ended      Year ended
                                  December 31    December 31    December 31    December 31    December 31     December 31
                                         1997           1996           1995           1997           1996            1995
                                  -----------    -----------    -----------    -----------    -----------     -----------
<S>                               <C>            <C>            <C>            <C>            <C>             <C>

      Provision for
       current year                    61,022         38,404         49,002          4,502            735             994
      Taxes relating
       to prior years                     201             91             19                           (11)           (573)
      Deferred taxes,
       net                            (17,691)         4,145         (2,328)         1,538         (1,651)         (1,396)
                                   -----------    -----------    -----------    -----------    -----------     -----------
                                       43,532         42,640         46,693          6,040           (927)           (975)
                                   -----------    -----------    -----------    -----------    -----------     -----------
                                   -----------    -----------    -----------    -----------    -----------     -----------

</TABLE>

                                       43

<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 30 - Taxes on Income (cont'd)

    D.   Final tax assessments for the Company have been received through the
         years 1993. Subsidiary companies have received final assessments for
         tax years 1987-1996. One subsidiary has not received tax assessments
         since inception (1986).

    E.   The main differences between the theoretical tax on the reported income
         and the amount of the provision for taxes actually charged for the
         current year:

<TABLE>
<CAPTION>

                                                               Consolidated                                   The Company
                                  -----------------------------------------    ------------------------------------------
                                   Year ended     Year ended     Year ended     Year ended     Year ended      Year ended
                                  December 31    December 31    December 31    December 31    December 31     December 31
                                         1997           1996           1995           1997           1996            1995
                                  -----------    -----------    -----------    -----------    -----------     -----------
<S>                               <C>            <C>            <C>            <C>            <C>             <C>
Adjusted income before taxes
 per statement of earnings            135,347        130,367        133,026         73,527         60,845          58,511
Statutory tax rate (%)                     36             36             37             36             36              37
                                  -----------    -----------    -----------    -----------    -----------     -----------
Theoretical tax on the
 adjusted earnings                     48,725         46,932         49,220         26,470         21,904          21,649
Addition (saving) of tax,
 from:

Company's equity in the net
 earnings of investee companies        (2,358)        (4,569)        (4,778)       (21,660)       (22,903)        (22,363)

Realization of investments
 in and gain on issue of
 capital by investee companies         (1,961)           (19)           (22)          (217)           (27)            (22)
Expenses not recognized  for tax
 purposes:
Depreciation and amortization           3,114          2,715          3,643            216            324             316
Others                                    149            149            386            140            118             118
Inflationary erosion of advance
 tax payments                             563          1,077          1,051              1              9              30
Income subject to reduced tax
 rates                                   (247)          (916)          (316)
Losses carried forward from
 prior years                           (2,098)        (3,086)          (805)
Losses for which deferred
 taxes were not provided (mainly
 from securities)                      (1,135)         1,226             35
Outside shareholder interest
 in joint venture                          (2)          (166)          (308)
Other - mainly difference in
 inflationary adjustment
 principles for financial
 reporting purposes and for
 tax purposes                          (1,419)          (794)        (1,432)         1,090           (341)           (130)
Adjustments relating to
 prior years                              201             91             19                           (11)           (573)
                                  -----------    -----------    -----------    -----------    -----------     -----------
                                       43,532         42,640         46,693          6,040           (927)           (975)
                                  -----------    -----------    -----------    -----------    -----------     -----------
                                  -----------    -----------    -----------    -----------    -----------     -----------
</TABLE>

                                        44

<PAGE>
                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------

Note 31 - Related Parties and Interested Parties


<TABLE>
<CAPTION>
                                                              Consolidated                                   The Company
                                 -----------------------------------------    ------------------------------------------
                                  Year ended     Year ended     Year ended     Year ended     Year ended      Year ended
                                 December 31    December 31    December 31    December 31    December 31     December 31
                                        1997           1996           1995           1997           1996            1995
                                 -----------    -----------    -----------    -----------    -----------     -----------
<S>                              <C>            <C>            <C>            <C>            <C>             <C>
A.  Balance sheet data
Cash, security deposits
 and receivables                     141,908         77,526         22,669          5,099          2,911           1,618
Loans from banks
 and provident funds                 151,515        151,196         12,613         10,502          1,118           2,222
Loans from
 investee companies -
Creditors - Orchard
 cultivation and others                  653            386             96            514
Subsidiary -
 current account                                                                   18,738         31,190
Highest balance during the                                                         40,488         31,190
 year

B. Statement of
 earnings data
Financing income from
 deposits and loans

From investee companies                                                                 3            750             674
From banks and others                  2,033          2,073          2,743                             7              37

Participation of related
 parties in general expenses

Other income from
 related parties

Management fees                        1,538          1,499          2,080          1,948          1,695           1,621
Rent                                  22,120         14,069         14,742          1,385          1,198           1,254

Financing charges to
 related parties
Investee companies                                                                  1,050          3,104           2,813
Banks and others                       8,903           4,775          2,229

Benefits to an
 interested party
 employed by the
 Company:
Salary and fringe benefits*            1,471          1,387          1,361          1,471          1,387           1,361

Payments to members of
 the Board of Directors
 (for 8 directors)                       267            297            298            267            297             298
</TABLE>

*      During the reporting year, the interested party exercised options that
       had been granted to him in the past (see Note 32D). The difference
       between the exercise price of the options and the value of the shares
       received according to the market prices of the shares on the dates of
       exercise, amounted to approximately NIS 922 thousand (1996 - difference
       in respect of utilization of rights to shares amounted to NIS 97
       thousand).

                                       45
<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


    Note 31 - Related Parties and Interested Parties (cont'd)

    C. Trust funds are managed by related parties.

    D. Transactions with entities connected with certain banking groups.

    The Company was exempted by the Securities Authority, from including
    the disclosure of transactions with an interested party, as is required
    by the regulations, other than in the case of extraordinary
    transactions. In the opinion of Management the transactions with such
    banks were effected in the ordinary course of business, at terms and at
    prices which are not different than regular market terms and prices.

Note 32 - Private Placement and Issue of Subsidiary

    A.      Private placement

    1.      In March 1995, the Company transferred 100% of the shares of Naveh
            Building and Development Ltd and 80% of the shares of Gad
            Construction Co. Ltd (the remaining 20% were held by Naveh) which
            were held by Property and Building Co. Ltd to Hadarim Properties
            Ltd. (hereinafter Hadarim), in consideration for the private
            placement of 3,281,500 shares of Hadarim of a par value of NIS 1
            each at a price of NIS 74.63 per share to Property and Building Co.
            Ltd.

    2.      In connection with the above private placement, Property and
            Building Co. has undertaken to indemnify Hadarim for the value of
            plots of land of a subsidiary, in respect of which there is a
            contract with the Israel Lands Authority, in the event that the
            contract will not be extended and the plots will revert to the
            authority. In the event that a payment will have to be made to the
            Authority, Property and Building Co will pay to Hadarim an amount
            which will not exceed NIS 11.1 million. Such amount will be linked
            to the cost of living index (of September 1995) and will bear
            interest of 8% p.a.

    B.      Issues by subsidiaries

    (1)     In the month of March 1996, the subsidiary, Hadarim Properties Ltd.,
            effected an issue to the public of registered bonds in the amount of
            NIS 49,988,750 (see Note 18.A.1.a). The bonds bear interest of 3.5%
            p.a., are linked to the consumer price index and are convertible
            until February 8, 2001. 615,625 share purchase option warrants which
            are exercisable until February 28, 2000, were also issued to the
            public. The proceeds from the public issues amounted to NIS 63,011
            thousand.

            In addition, 2,072,600 ordinary shares of NIS 1 each were issued to
            the shareholders of the subsidiary by way of rights. The proceeds of
            this issue amounted to NIS 82,879 thousand.

                                       46

<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 32 - Private Placement and Issue of Subsidiary (cont'd)

    B.      Issues by subsidiaries (cont'd)

    (2)     In the month of September 1997, the subsidiary, Bayside Land
            Corporation Ltd., effected an issue to the public of registered
            bonds in the amount of NIS 130,005,000. The bonds bear interest of
            2.5% p.a., are linked to the consumer price index and are
            convertible until August 31, 2001.

            270,000 share purchase option warrants which are exercisable until
            September 20, 1997, were also issued to the public.

            The proceeds from the public issues amounted to NIS 125,227
            thousand.

    C.      A security issue by the Company

    In May 1996 the Company issued 549,356 ordinary shares of a par value of NIS
    1 each, by way of rights to shareholders and by holders of the unquoted
    option warrants of the Company.

    In addition, the Company issued 7,357 ordinary shares to employees. The net
    proceeds of the issues was NIS 79,416 thousand.

    D.      Share purchase option programs

    1.      The Company has the following share purchase option programs for its
            employees and for the employees of its subsidiaries:

            a)  A program dated May 19, 1992 for the allotment of 24,996 option
                warrants, at no cost, to senior executives of the Company and of
                its subsidiaries, for the purchase of up to 24,996 shares of the
                Company (of which 7,099 option warrants were allotted to the
                Managing Director). One half of the option warrants were
                allotted immediately following the date of the program, and the
                second half were issued one year thereafter. The options are
                exercisable over a three year period, commencing two years after
                the date they were allotted. During 1997, the option holders
                exercised 24,043 options at an aggregate exercise price of NIS
                3,874 thousand (as at balance sheet date). According to the
                terms of the program, loans were made available to the employees
                holding the options in an aggregate amount of NIS 3,104
                thousand (as at balance sheet date). The loans bear interest of
                2% and are repayable in three annual installments. As at balance
                sheet date, all of the option warrants of this program had been
                exercised.

                                       47

<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 32 - Private Placement and Issue of Subsidiary (cont'd)

    D.      Share purchase option programs (cont'd)

            b)  A program dated October 5, 1994 for the allotment of 14,860
                option warrants, at no cost, to senior executives of the Company
                and of its subsidiaries for the purchase of up to 14,860 shares
                of the Company (of which 4,250 option warrants were allotted to
                the Managing Director). 7,430 option warrants were allotted
                immediately following the date of the program and 6,518 option
                warrants were allotted one year thereafter. The options are
                exercisable after the lapse of two years from the date they
                were allotted. The first portion is exercisable within two
                years, and the second portion within one year. As at balance
                sheet date, the exercise price per option of the first portion
                is NIS 269.09 and NIS 219.28 per option of the second portion.
                According to a prospectus published on May 31, 1996 for the
                issue of rights of the Company, the option holders were granted
                rights to purchase 2,144 shares. As at balance sheet date, the
                exercise price per right was NIS 145.6. In 1997, 300 option
                warrants were exercised as were the rights to purchase 1,142
                shares, which produced proceeds aggregating NIS 246 thousand (as
                at balance sheet date). The outstanding balance of the option
                warrants and rights entitles their holders to purchase 14,650
                shares of the Company.


            c)  A program dated December 4, 1997 for the allotment of 40,140
                option warrants, at no cost, to senior executives of the Company
                and of its subsidiaries for the purchase of 40,140 shares of the
                Company (of these, the Managing Director is entitled to 11,707
                option warrants). The options will be allotted in three equal
                portions and will be exercisable over a three year period,
                commencing two years after the date they were allotted. The
                exercise price of the first portion is NIS 241.62 per option.
                This price which is linked to the representative exchange rate
                of the U.S. dollar of December 2, 1997 represents the average
                market price of the Company's shares during the 30 trading days
                preceding the date of the program, less 10%. The exercise price
                of the second and third portions will be the lower of the above
                mentioned exercise price linked to the exchange rate of the U.S.
                dollar or the average of the closing market prices in the 7
                trading days preceding the date they were granted. Assuming that
                all of the as yet unexercised option warrants of the above
                described programs will be exercised, all of the shares acquired
                under these option programs, represent 0.96% of the Company's
                equity and voting rights.

    2.      Subsidiaries have share purchase option programs as described below:

            a)  Bayside Land Company Ltd., published two share purchase option
                programs for its senior employees, in accordance with
                resolutions of the Board of Directors dated October 11, 1994,
                and November 12, 1997. The options allotted under both programs
                combined entitles their holder to purchase up to 19,388 shares
                of Bayside of a par value of NIS 1 each. Assuming that all of
                the option warrants still outstanding will be exercised, all of
                the shares acquired under these two option programs represent
                0.89% of Bayside's share capital.

                                       48

<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 32 - Private Placement and Issue of Subsidiary (cont'd)

    D.      Share purchase option programs (cont'd)

            b)  Hadarim Properties Ltd. allotted 8,727 share purchase option
                warrants (Series 1) to its employees under a prospectus
                published on February 22, 1996. The said subsidiary also
                published an option program on January 14, 1998 for the
                allotment of 68,307 share purchase option warrants to its senior
                employees and to the employees of its subsidiaries. Assuming
                that all of the outstanding option warrants allotted under the
                above two programs will be exercised, all of the shares
                acquired represent 1.06% (0.86% in full dilution) of Hadarim
                Properties equity and voting rights.

            c)  Ispro Israeli Company for building rental, published a share
                purchase option program on January 14, 1998 allotting options to
                its senior employees to purchase 41,513 of its shares. Assuming
                that all of the options allotted will be exercised, the shares
                which will thereby be acquired represent 1.3% of Aspro's equity
                and voting rights.

Note 33 - Financial Instruments and Risk Management

    A.     Risk management

    As at December 31, 1997 and 1996 the Group had cash and cash equivalents on
    deposit with Israeli banks in the amount of NIS 155,202 thousand and NIS
    58,376 thousand respectively. Marketable securities of NIS 35,509 thousand
    and NIS 34,722 respectively, held by the Group consist mainly of quoted
    government bonds, mutual fund certificates and other debentures. The debts
    of apartment purchases included in the balance sheet are secured by the
    apartments themselves until delivery, which is effected only upon final
    payment. Therefore, the Company does not consider itself subject to any
    significant risk exposure.

    B.     Fair value of financial instruments

    The Groups' financial instruments consist of non-derivative assets; cash and
    cash equivalents, quoted securities, and accounts receivable, and
    non-derivative liabilities, short-term credit, accounts payable, loans,
    convertible debentures and other liabilities. Because of their nature the
    fair value of the financial instruments described above, included in working
    capital is the same as the value at which they are stated in the balance
    sheet. The fair value of the loans included in other long-term liabilities,
    liabilities to banks and provident funds is also close to its value as
    stated in the balance sheet, since such financial instruments bear interest
    at rates which are close to the going market interest rates. The fair value
    of the convertible debentures is given in Note 18A(1). The fair value of
    marketable debentures is presented in Note 18A(2).

                                       49

<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 34 - Condensed Financial Statements in Nominal
              Historical Values - The Company

   A.      Balance Sheet

<TABLE>
<CAPTION>

                                                   December 31       December 31
                                                          1997              1996
                                                   -----------       -----------

  <S>                                             <C>                <C>
   Current Assets

   Cash and cash equivalents                             1,504             1,076
   Marketable securities                                   593               584
   Trade receivables
   Other receivables                                     4,900             3,509
   Building projects under construction and
    other inventory                                      3,357             5,676
                                                   -----------       -----------
                                                        10,354            10,845
                                                   -----------       -----------
   Land                                                  5,348            14,962
                                                   -----------       -----------
   Long term Loans                                       2,615             1,059
                                                   -----------       -----------
   Investments

   In investee and other companies                     563,248           500,860
                                                   -----------       -----------

   Fixed Assets

   Buildings, land, plantations
    and other                                           10,126             9,160

   Less/- Accumulated depreciation                         599               454
                                                   -----------       -----------
                                                         9,527             8,706
                                                   -----------       -----------
   Deferred Charges                                         28                30
                                                   -----------       -----------
                                                       591,120           536,462
                                                   -----------       -----------
                                                   -----------       -----------

</TABLE>

                                       50

<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 34 - Condensed Financial Statements in Nominal
              Historical Values - The Company (cont'd)

         A.    Balance Sheet (cont'd)

<TABLE>
<CAPTION>
                                             December 31    December 31
                                                    1997           1996
                                             -----------    -----------
   <S>                                               <C>            <C>

   Current Liabilities

   Advances from purchasers of
    apartments and others, net                     1,402          9,172
   Short-term bank credit                                           349
   Current maturities of long-term liabilities     2,402          8,360
   Other payables                                 32,367         43,746
   Proposed dividend                              17,000         11,500
                                             -----------    -----------
                                                  53,171         73,127
                                             -----------    -----------

   Long-term Liabilities

   Liabilities to banks and provident funds        8,100            348
   Other long-term liabilities
   Liability for employee severance benefits                          1
                                             -----------    -----------
                                                   8,100            349
                                             -----------    -----------

   Shareholders' Equity                          529,849        462,986
                                             -----------    -----------
                                                 591,120        536,462
                                             -----------    -----------
                                             -----------    -----------
   </TABLE>

                                       51
<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 34 - Condensed Financial Statements in Nominal
              Historical Values - The Company (cont'd)

   B.       Statements of Earnings for the Year Ended December 31

<TABLE>
<CAPTION>

                                                        1997         1996         1995
                                                     -------      -------      -------
   <S>                                               <C>          <C>        <C>

   Income

   Rentals and warehousing                             7,643       6,827         6,156
   From construction                                  49,084
   The Company's equity in the net
    earnings of investee companies, net               72,225      86,417        66,690
   Gains from investments and fixed assets             1,904          22           103
   Income from securities, financing
    and other income                                   2,770       3,603         2,843
                                                     -------      -------      -------
                                                     133,626      96,869        75,792
                                                     -------      -------      -------
   Costs and expenses

   Construction                                       34,669
   Administrative, selling and others                  8,014       6,340         5,485
   Property maintenance (excluding depreciation)         763         733           652
   Depreciation and amortization                         147         146           150
   Property taxes on land                                817         864           398
   Interest and linkage differences                    4,214       9,720         5,313
                                                     -------      -------      -------
                                                      48,624      17,803        11,998
                                                     -------      -------      -------
   Earnings before taxes on income                    85,002      79,066        63,794

   Taxes on income                                     5,005      (1,036)        (864)
                                                     -------      -------      -------
   Net earnings for the year                          79,907      80,102        64,658
                                                     -------      -------      -------
                                                     -------      -------      -------
</TABLE>

                                       52
<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 34 - Condensed Financial Statements in Nominal
              Historical Value - The Company (cont'd)

        C.     Statement of Shareholders' Equity
<TABLE>
<CAPTION>

                                     Share    Capital    Retained    Total
                                   capital    surplus    earnings
                                   -------    -------    --------   -------

   <S>                              <C>       <C>        <C>       <C>
    Balance as at
     January 1, 1995                 3,546     11,019     245,427   259,992


    Net earnings for the year
     ended December 31, 1995                               64,658    64,658
    Capital surplus from private
     placement of shares of a
     subsidiary                                 6,390                 6,390
    Proposed dividend - 240%                               (8,500)   (8,500)
                                   -------    -------    --------   -------
    Balance as at
     December 31, 1995               3,546     17,409     301,585   322,540

    Net earnings for the year
     ended December 31, 1996                               80,102    80,102
    Capital issue                      557     71,287                71,844
    Proposed dividend - 280%                              (11,500)  (11,500)
                                   -------    --------   --------  --------
    Balance as at
     December 31, 1996               4,103     88,696     370,187   462,986

    Net earnings for current year                          79,907    79,907
    Capital issue                       26      3,930                 3,956
    Proposed dividend - 412%                              (17,000)  (17,000)
                                   -------    --------   --------  --------

    Balance at December 31,
     1997                            4,129     92,626     433,094   529,849
                                   -------    -------    --------   -------
                                   -------    -------    --------   -------
</TABLE>

                                       53
<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 34 - Condensed Financial Statements in Nominal
              Historical Value - The Company (cont'd)

    D.       Share capital (cont'd)

    1.       Composition
<TABLE>
<CAPTION>

                                               December 31, 1997          December 31, 1996
                                         -----------------------    -----------------------
                                         Authorized       Issued    Authorized       Issued
                                         ----------   ----------    ----------   ----------
                                                NIS          NIS           NIS          NIS
                                         ----------   ----------    ----------   ----------
   <S>                                  <C>          <C>           <C>           <C>

    Ordinary shares of a par value
     of NIS 1 each (registered) -

    Listed on the Tel-Aviv
     Stock Exchange                       6,000,000    4,128,965     6,000,000    4,103,480
                                         ----------   ----------    ----------   ----------
                                         ----------   ----------    ----------   ----------
</TABLE>


Note 35 - Statements for Incorporation in the Financial Statements of PEC

     A.       Change in Reporting Principles

     The main consolidated financial statements of Property and Building
     Corporation Limited and subsidiaries as at December 31, 1997 and for
     the year ended at that date are prepared in NIS adjusted for the
     changes in the consumer price index, according to the rules set forth
     in the opinions of the Institute of Certified Public Accountants in
     Israel.

     For the purpose of their inclusion in the financial statements of the
     ultimate American shareholder of the Company, PEC Israel Economic
     Corporation ("PEC"), the Company prepared these special condensed
     financial statements ("special statements") which are presented in
     accordance with the instructions of PEC (see below).

     Up to and including December 31, 1992, for the purpose of inclusion in
     the financial statements of PEC, the Company prepared financial
     statements in U.S. dollars ("dollars"). These dollar financial
     statements were translated into dollar terms in accordance with the
     remeasurement principles set forth in Opinion No. 52 of the Financial
     Accounting Standards Board of the United States for entities operating
     in highly inflationary economies.

     The rate of inflation declined significantly in recent years. For this
     reason, in 1993 PEC decided that the translation to dollars will be
     done in accordance with the principles applied regarding economies
     which are no longer considered highly inflationary.

                                       54
<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 35 - Statements for Incorporation in the Financial Statements of PEC
(cont'd)

   A.       Change in Reporting Principles (cont'd)

   These statements were prepared for the purpose of their translation
   into dollars and inclusion in the consolidated financial statements of
   PEC, according to the instructions of PEC, as follows:

   1.       The special statements are prepared in nominal NIS.

   2.       The balances in NIS as at January 1, 1993, were calculated by
            the translation to NIS of the non-monetary assets and capital
            reserves and surplus as presented in the dollar statements as
            at December 31, 1992 according to the exchange rate in effect
            at that date ($1 = NIS 2.764).

   3.       Transactions executed after January 1, 1993 are stated in the
            special statements at their original value in nominal NIS.

   4.       In addition to their being presented according to the
            instructions of PEC, the special statements were adjusted to
            accounting principles generally accepted in the United States.

   5.       During 1995 the Company adopted Opinion No. 57 of the
            Institute of Certified Public Accountants in Israel whereby
            entities under joint control are consolidated on a
            proportionate basis. For the purposes of this Note the opinion
            has not been implemented. The non-implementation has no effect
            on the profits reported in this note.

                                       55
<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 35 - Statements for Incorporation in the Financial Statements of PEC
(cont'd)

   B.     Condensed Financial Statements

   1.     Balance Sheet

<TABLE>
<CAPTION>
                                                                   Consolidated
                                                     ---------------------------
                                                     December 31    December 31
                                                            1997           1996
                                                     -----------    ------------
  <S>                                                  <C>              <C>

   Current Assets

   Cash and cash equivalents                            155,017          55,336
   Short-term deposits and loans                          1,628          15,760
   Marketable securities                                 35,509          32,454
   Trade receivables                                     20,501          39,544
   Other receivables and debit
    balances                                             30,844          24,143
   Apartments and other
    inventories                                           5,482          15,051
   Building projects under
    construction                                        100,919          53,467
                                                     -----------    ------------
                                                        350,080         235,755
                                                     -----------    ------------
   Land                                                 319,774         321,738
                                                     -----------    ------------
   Long-term Deposits                                     3,247           1,091
                                                     -----------    ------------
   Investments
   In investee companies                                102,505         121,735
                                                     -----------    ------------

   Fixed Assets

   Buildings, land and other                            856,560         675,157

   Less/- Accumulated depreciation                      113,619          96,850
                                                     -----------    ------------
                                                        742,941         578,307
                                                     -----------    ------------

   Deferred Charges and Other
    Assets                                               65,419          41,383
                                                     -----------    ------------
                                                      1,583,966       1,300,009
                                                     -----------    ------------
                                                     -----------    ------------

</TABLE>

                                       56
<PAGE>
                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------

Note 35 - Statements for Incorporation in the Financial Statements of PEC
(cont'd)

   B.     Condensed Financial Statements (cont'd)

   1.     Balance Sheet (cont'd)

<TABLE>
<CAPTION>
                                                                  Consolidated
                                                  ----------------------------
                                                  December 31      December 31
                                                         1997             1996
                                                  -----------       ----------
   <S>                                           <C>                   <C>
   Current Liabilities

   Advances from purchasers of
    apartments and others, net                       11,965             12,873
   Credit from banks                                 28,955             12,252
   Current maturities of long-term
    liabilities                                      44,138             46,639
   Suppliers and sub-contractors                     22,379             31,518
   Creditors and credit balances                     57,968             55,182
   Deferred taxes                                       105              6,500
   Proposed dividend                                 23,107             16,289
                                                  ---------         ----------
                                                    188,617            181,253
                                                  ---------         ----------

   Long-term Liabilities

   Long-term loans                                  551,475            374,174
   Deferred taxes                                     1,284              1,660
   Liability in respect of employee
    severance benefits                                2,362              2,232
                                                  ---------         ----------
                                                    555,121            378,066
                                                  ---------         ----------
   Minority interest                                212,329            184,636
                                                  ---------         ----------
   Receipt on account of option
    warrants in a subsidiary                          8,665              8,665
                                                  ---------         ----------
   Shareholders' Equity

   Share capital                                     81,312             81,287
   Capital surplus                                   92,684             88,460
   Retained earnings                                445,238            377,642
                                                  ---------         ----------
                                                    619,234            547,389
                                                  ---------         ----------
                                                  1,583,966          1,300,009
                                                  ---------         ----------
                                                  ---------         ----------
</TABLE>
                                       57
<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 35 - Statements for Incorporation in the Financial Statements of PEC
(cont'd)


  B.     Condensed Financial Statements (cont'd)

  2.     Statement of Earnings for the Year Ended December 31
<TABLE>
<CAPTION>

                                                                        Consolidated
                                                       -----------------------------
                                                        December 31      December 31
                                                               1997             1996
                                                        -----------      -----------
  <S>                                                      <C>             <C>
   Income

   Rentals and warehousing                                  135,647          114,593
   From construction and other sources                      254,702          201,753
   The Company's equity in the net
    earnings of investee companies                           12,435           16,710
   Gains on sale of investments and fixed assets             12,652            2,780
   Income from securities, financing and others              18,664           20,810
                                                        -----------      -----------
                                                            434,100          356,646
                                                        -----------      -----------
   Cost and expenses
   Construction and other costs                             176,030          135,188
   Administrative, selling and others                        36,913           32,123
   Property maintenance (excluding  depreciation)            11,231            9,598
   Depreciation and amortization                             14,570           10,854
   Property taxes on land                                     8,510            6,617
   Financing(*)                                              48,699           34,239
                                                        -----------      -----------
                                                            295,953          228,619
                                                        -----------      -----------
   Earnings before taxes on income                          138,147          128,027
   Taxes on income                                           23,415           20,324
                                                        -----------      -----------
   Earnings after taxation                                  114,732          107,703



   Less/- Minority interest in earnings                      30,136           30,157
                                                        -----------      -----------
   Net earnings                                              84,596           77,546
                                                        -----------      -----------
                                                        -----------      -----------
   Earnings Per Share
   Primary earnings per share of NIS 1.00 par
    value (in NIS)                                            20.53            19.92
                                                        -----------      -----------
                                                        -----------      -----------
   Diluted earning per share                                  19.72            19.58
                                                        -----------      -----------
                                                        -----------      -----------

</TABLE>


   *        A subsidiary engaged in construction work, purchased real estate
            rights for construction projects. These investments were financed by
            bank loans and by other Group companies, in a total amount of NIS
            131 million. The financing expenses relating to such loans, which
            amounted to NIS 17,400 thousands during the year ended December 31,
            1996, were attributed in these statements to the cost of the real
            estate, resulting in an increase in the net earnings for the period
            of NIS 11,136 thousands.

                                       58
<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 35 - Statements for Incorporation in the Financial Statements of PEC
(cont'd)

    B.     Condensed Financial Statements (cont'd)

    3.     Statement of Shareholders' Equity

<TABLE>
<CAPTION>

                                                      Share            Capital           Retained             Total
                                                    capital            surplus           earnings
                                                   --------            -------           --------            ------
<S>                                                <C>                <C>              <C>                <C>
    Balance as at
     January 1, 1996                                80,729             16,700           311,596            409,025

    Net earnings for the year
     ended December 31, 1996                                                             77,546             77,546

    Issue of share                                     558             71,287                               71,845

    Paid-in capital stock options, net                                    473                                  473

    Proposed dividend, net - 280%                                                       (11,500)           (11,500)
                                                   --------            -------          --------            ------
    Balance as at
     December 31, 1996                              81,287             88,460           377,642            547,389

    Net earnings for the year
     ended December 31, 1997                                                             84,596             84,596

    Issue of Shares                                     25              3,930                                3,955

    Paid in capital options, net                                          294                                  294

    Proposed dividend, net -412%                                                        (17,000)           (17,000)
                                                   --------            -------          --------            ------
    Balance as at
     December 31, 1997                              81,312             92,684           445,238            619,234
                                                  --------            -------           --------            ------
                                                  --------            -------           --------            ------

</TABLE>
                                       59
<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Note 35 - Statements for Incorporation in the Financial Statements of PEC
(cont'd)

        C.      Adjustment of the nominal historical income to the income for
                the purpose of PEC:

<TABLE>
<CAPTION>

                                                                      Year ended
                                                   -----------------------------
                                                   December 31       December 31
                                                          1997              1996
                                                   -----------       -----------
   <S>                                             <C>              <C>

    Nominal historical net income as per
     the statement of earnings                         79,907             80,102

    Adjustment of differences relating to
     the following items:                               1,245                405

    Advances from apartment purchasers                                      (195)
    Construction work and land                           (544)            (2,677)
    The Company's equity in the net earnings
     of investee companies                                657             (1,355)
    Income from investments and fixed assets           (1,881)                19
    Financing                                             854             (2,609)
    Depreciation and amortization                      (3,169)            (3,287)
    Deferred taxes                                      9,113              8,370
    Minority interest in earnings                      (1,758)              (701)
    Others                                                172               (526)
                                                   -----------       -----------
    Net income for the special purpose
     statement of earnings                             84,570             77,546
                                                   -----------       -----------
                                                   -----------       -----------

</TABLE>

                                       60

<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Annex - Percentage of Holding in Investee Companies as at December 31, 1997
<TABLE>
<CAPTION>

                                                                          1997                                 1996
                                                     -------------------------           --------------------------
                                                        Percent of holding (1)               Percent of holding (1)
                                                     -------------------------           --------------------------
                                                      Voting            Equity             Voting            Equity
                                                     -------           -------            -------           -------
                                                         %                 %                  %                 %
                                                     -------           -------            -------           -------
 <S>                                                <C>                <C>              <C>              <C>
  Subsidiary companies

  Bayside Land Corporation Ltd.*(2)                    70.58             64.42             71.12            64.87
  Hadarim Properties Ltd. (3)                          90.00             90.00             90.00            90.00
  Naveh Building & Development Ltd.                    90.00             90.00             90.00            90.00
  "Gad" Building Company Ltd.                          90.00             90.00             90.00            90.00
  "Ispro" The Israeli Properties
   Rental Corp. Ltd.                                   66.38             66.38             65.26            65.26
  Shadar Building Company Ltd.                        100.00            100.00            100.00           100.00
  Merkaz Herzlia "A" Ltd.                             100.00            100.00            100.00           100.00
  Merkaz Herzlia "B" Ltd. (4)                         100.00             74.16            100.00            74.16
  "Hon" Investment and Trust
   Company Ltd.                                       100.00            100.00            100.00           100.00
  Property and Building
   (Finance 1986) Ltd.                                100.00            100.00            100.00           100.00
  Aclim 2000 for Ecology Ltd.                         100.00            100.00            100.00           100.00
  "Gilat" Building and Housing
   in Development Areas Ltd.                          100.00            100.00            100.00           100.00
  Nichsei Nachalat Beit
   Hashoeva B.M.(5)                                   100.00            100.00             50.00            50.00
  Em Hamoshavot - Hatzafone
   Hachadash                                          100.00            100.00

  Affiliated companies

  Science Based Industries
   Campus Ltd.                                         50.00             50.00             50.00            50.00
  Mehadrin Ltd.                                        34.96             34.96             34.96            34.96
  Pri - Or Ltd. (6)                                                                        12.12            12.12
  Bartan Holdings and
   Investment Ltd.                                     30.93             30.93             37.19            37.19
  K.B.A Townbuilders Group Ltd. (7)                    23.06             23.06             20.59            20.59

</TABLE>
  (1)      Including shareholding through subsidiaries.

  (2)      Conversion of the Consolidated Companies will dilute the Companies'
           holdings from 53.76% in capital stock and 54.76% in voting.

                                       61
<PAGE>


                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


Annex - Percentage of Holding in Investee Companies as at December 31, 1997

    (3)     The conversion of the debentures of the subsidiary will result in
            the dilution of the Company's holding therein to 82.86%.

            The exercise of the option warrants of the subsidiary together with
            the conversion of the debentures will result in the dilution of the
            Company's holding to 76.78%.

    (4)     This shareholding entitles the Company to 97.35% of the profits
            distributed by way of cash dividend.

    (5)     Directly and through the Company A.A. Holdings Ltd.

    (6)     As to the diluted influence of the Consolidated Employee Option Plan
            - See Note 23(D)(2).


    Details in respect of the Equity and profits of affiliated companies (not
    public companies) based on their last financial statements in NIS thousands.

<TABLE>
<CAPTION>

                                                          Equity                 Profit                Total assets
                                                 ---------------       ------------------------     ---------------
                                                 Adjusted values            Adjusted values         Adjusted values
                                                 ---------------       ------------------------     ---------------
                                                                       Before tax     After tax
                                                                       ----------    ----------
  <S>                                                    <C>              <C>           <C>                <C>
   K.B.A. Townbuilders Group Ltd.                         98,746           42,958        27,273             201,032
   Bartan Holdings and Investment
    Ltd.                                                  31,275            1,830         1,717              47,943
   Science Based Industries
    Campus Ltd.                                           17,795            5,806         3,660              22,398


</TABLE>
                                       62
<PAGE>

             [LETTERHEAD OF KESSELMAN & KESSELMAN AND COOPERS & LYBRAND]


March 10, 1998

Somekh, Chaikin, CPA's
Tel-Aviv

Dear Sirs,

Re: Bayside Land Corporation Ltd.
    -----------------------------

We have audited the primary financial statements of Bayside Land Corporation
Ltd. (hereafter - the company) at December 31, 1997 and for the year then ended,
which have been adjusted on the basis of the changes in the consumer price
index, in accordance with the provisions of Opinions of the Institute of
Certified Public Accountants in Israel.

Based on our audits, we issued an unqualified auditors' report, dated March
10, 1998, on the above financial statements.

The attached special condensed financial statements of the company and its
subsidiaries at December 31, 1997 and for the year then ended (the "special
statements") were drawn up in accordance with the instructions of the
company's ultimate American shareholder - PEC Israel Economic Corporation
("PEC"), solely for the purpose of inclusion in PEC's consolidated financial
statements (see note to the special statements).

At the company's request, we hereby report that the special statements are
presented properly, in accordance with the instructions of PEC, as explained
in the note to the special statements.

Sincerely,

Kesselman & Kesselman


<PAGE>

KESSELMAN                     COOPERS
& KESSELMAN                   & LYBRAND

certified public
accountants (Isr.)


                                                       H0-11288-90008972

March 10, 1998

Naveh Building and Development Limited
Tel-Aviv

Dear Sirs,

Re: Naveh Building and Development Limited
    --------------------------------------

We have audited the primary financial statements of Naveh Building and
Development Limited (hereafter - the company) at December 31, 1997 and 1996 and
for each of the three years in the period ended December 31, 1997, which have
been adjusted on the basis of the changes in the consumer price index, in
accordance with the provisions of Opinions of the Institute of Certified Public
Accountants in Israel.

Based on our audits, we issued an unqualified auditors' report, dated March 1,
1997, on the above financial statements.

The attached special condensed financial statements of the company and its
subsidiaries at December 31, 1997 and 1996 and for each of the three years in
the period ended December 31, 1997 (the "special statements") were drawn up in
accordance with the instructions of the company's ultimate American shareholder
- PEC Israel Economic Corporation ("PEC"), solely for the purpose of inclusion
in PEC's consolidated financial statements (see note to the special statements).

At the company's request, we hereby report that the special statements are
presented properly, in accordance with the instructions of PEC, as explained in
the note to the special statements.

Sincerely,

Kesselman & Kesselman


<PAGE>

    Tambour Limited and Subsidiaries
    Financial Statements
    December 31, 1997

<PAGE>


                                                Tambour Limited and Subsidiaries

Financial Statements as at December 31, 1997
--------------------------------------------------------------------------------


CONTENTS

<TABLE>
<CAPTION>
                                                                              PAGE
                                                                              ----
<S>                                                                            <C>

Auditor's Report                                                               1

Consolidated Balance Sheets                                                    2

Consolidated Statements of Income                                              4

Statement of Changes in Shareholders' Equity                                   5

Consolidated Statements of Cash Flows                                          6

Balance Sheets--The Company                                                    9

Statements of Income--The Company                                             11

Statements of Cash Flows--The Company                                         12

Notes to the Financial Statements                                             14

Appendix                                                                      61
</TABLE>


<PAGE>

                          [LETTERHEAD OF SOMEKH CHAIKIN]


Tirat HaCarmel, March 6, 1998


REPORT OF THE INDEPENDENT PUBLIC ACCOUNTANTS
TAMBOUR LIMITED

    We have audited the accompanying balance sheets of Tambour Ltd. ("the
Company") as at December 31, 1997 and 1996 and the consolidated balance
sheets of the Company and its subsidiaries as at such dates, and the related
statements of income, changes in shareholders' equity, and cash flows, of the
three years in the period then ended, expressed in New Israel Shekels. These
financial statements are the responsibility of the Company's Management.

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

    We did not audit the financial statements of certain subsidiaries, whose
assets constitute 10.5% and 9.5% of the total consolidated assets as at December
31, 1997 and 1996, respectively, and whose revenues constitute 7.5% of the total
consolidated revenues for the years ended December 31, 1997 and 1996,
respectively. The financial statements of those subsidiaries were audited by
other auditors whose reports thereon were furnished to us. Our opinion, insofar
as it relates to amounts emanating from the financial statements of such
subsidiaries, is based solely on the said reports of the other auditors.
Furthermore, the data included in the financial statements relating to the net
asset value of the Company's investments in affiliates and to its equity in
their operating results is based on the financial statements of such affiliates,
some of which were audited by other auditors.

    We conducted our audits in accordance with generally accepted auditing
standards, including standards prescribed by the Auditors Regulations (Manner
of Auditor's Performance) 1973 and, accordingly, we have performed such
auditing procedures as we have 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 United States. These standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. 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 of the Institute of Certified Public
Accountants in Israel.

    Condensed statements of the Company in historical values which form the
basis of the adjusted statements appear in Note 21 to the financial
statements.

    In our opinion, based on our audit and on the reports of other auditors,
the above mentioned financial statements present fairly, in all material
respects, the financial position of the Company and the consolidated
financial position of the Company and its subsidiaries as at December 31,
1997 and 1996, 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, 1997, 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
nominal/historical net income (loss) and shareholders' equity to the extent
summarized in Note 23 to the financial statements.


    Somekh Chaikin

    Certified Public Accountants (Israel)

<PAGE>

Consolidated Balance Sheets as at December 31
--------------------------------------------------------------------------------

Adjusted to New Israel Shekels of December 1997


<TABLE>
<CAPTION>
                                                                                         1997            1996
                                                                                     -----------     ------------
                                                                           NOTE     NIS THOUSANDS   NIS THOUSANDS
                                                                         ---------  --------------  --------------
<S>                                                                      <C>        <C>             <C>

Current assets

Cash and cash equivalents                                                                 31,409          61,277

Marketable securities                                                            3        52,782          55,806

Accounts receivable--trade                                                      4A       187,115         166,280

Other receivables                                                               4B        26,383          25,895

Bank deposits                                                                   5A        17,191           3,561

Inventories                                                                      6       105,274         110,875
                                                                                         -------         -------
                                                                                         420,154         423,694
                                                                                         -------         -------
Investments and long-term assets

Affiliated companies                                                            7B        31,603          21,257

Bank deposits and other receivables                                             5B         3,545          19,927

Deferred taxes, net                                                            17C           266             189
                                                                                         -------         -------
                                                                                          35,414          41,373

Property, plant and equipment                                                    8

Cost                                                                                     529,169         616,910

Less: Accumulated depreciation                                                           327,097         415,301
                                                                                         -------         -------
                                                                                         202,072         201,609
                                                                                         -------         -------
Intangible assets and deferred charges                                           9         1,503          15,045
                                                                                         -------         -------
                                                                                         659,143         681,721
                                                                                         -------         -------
                                                                                         -------         -------
</TABLE>


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

                                       2

<PAGE>
                                                Tambour Limited and Subsidiaries
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                         1997            1996
                                                                                      ----------     ------------
                                                                           NOTE     NIS THOUSANDS   NIS THOUSANDS
                                                                         ---------  --------------  --------------
<S>                                                                      <C>        <C>             <C>

Current liabilities

Bank credits and others                                                         10        26,395          25,211

Accounts payable--trade                                                        11A        39,444          38,611

Other accounts payable                                                         11B        50,729          40,160

Dividend declared                                                               22        44,842          53,494
                                                                                         -------         -------
                                                                                         161,410         157,476
                                                                                         -------         -------

Long-term liabilities

Long-term debt                                                                 12A         3,532           3,926

Convertible debentures of a subsidiary                                         12B        --               3,089

Liability regarding termination of employee-employer relationship,
  net                                                                           13         8,008           2,102

Deferred taxes, net                                                             17C        7,511           4,804
                                                                                         -------         -------

                                                                                          19,051          13,921
                                                                                         -------         -------

Minority interest                                                                         37,152          37,100
                                                                                         -------         -------

Liens, guarantees contingencies and commitments                                 15

Shareholders' equity                                                            14

Common stock                                                                              97,307          97,307

Paid-in capital                                                                          228,742         228,742

Retained earnings                                                                        116,588         148,282
                                                                                         -------         -------
                                                                                         442,637         474,331

Less: Company shares held by subsidiary                                                    1,107           1,107
                                                                                         -------         -------
                                                                                         441,530         473,224
                                                                                         -------         -------
                                                                                         659,143         681,721
                                                                                         -------         -------
                                                                                         -------         -------
</TABLE>

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


----------------------------------------------
JACOB ESHEL--ACTING CHAIRMAN

----------------------------------------------
REUBEN SHULSTEIN--DIRECTOR AND GENERAL MANAGER

March 6, 1998


                                       3

<PAGE>

Consolidated Statements of Income for the Year Ended December 31
--------------------------------------------------------------------------------

Adjusted to New Israel Shekels of December 1997

<TABLE>
<CAPTION>
                                                                         1997           * 1996           1995
                                                                     ----------      -----------     -----------
                                                           NOTE     NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS
                                                         ---------  --------------  --------------  --------------
<S>                                                      <C>        <C>             <C>             <C>

Revenue from sales                                             19A       631,134         634,966         594,820

Cost of sales                                                  19B       412,763         418,190         397,284
                                                                         -------         -------         -------
Gross profit                                                             218,371         216,776         197,536
                                                                         -------         -------         -------

Selling and marketing expenses                                 19C       127,036         110,524          95,111

General and administrative expenses                            19D        47,191          41,269          36,875
                                                                         -------         -------         -------
                                                                         174,227         151,793         131,986
                                                                         -------         -------         -------
Operating income                                                          44,144          64,983          65,550

Finance expenses, net                                          19E        (1,402)         (5,745)         (2,839)

Other income (expenses), net                                   19F          (804)          1,189           4,031
                                                                         -------         -------         -------
Income before income taxes                                                41,938          60,427          66,742

Income taxes                                                   17E        14,336          23,785          27,851
                                                                         -------         -------         -------
Net income after income taxes                                             27,602          36,642          38,891

Equity in income (losses) of affiliated companies,
  net                                                                       766              30            (653)

Minority interest in subsidiaries' income                                (1,711)         (2,233)           (833)
                                                                         -------         -------         -------
Net income from continuing operations                                    26,657          34,439          37,405

Income from discontinued operations, net                      19G         4,956           1,438          --
                                                                         -------         -------         -------

Net income for the year                                                   31,613          35,877          37,405
                                                                         -------         -------         -------
                                                                         -------         -------         -------

Earnings per NIS 1 par value of shares--in NIS:

Primary and diluted earnings per share--continuing
  operations                                                                0.44            0.55            0.62
                                                                         -------         -------         -------
                                                                         -------         -------         -------

Primary and diluted earnings per share-- discontinued
  operations                                                                0.08            0.04          --
                                                                         -------         -------         -------
                                                                         -------         -------         -------

Primary and diluted earnings per share--net income                          0.52            0.59            0.62
                                                                         -------         -------         -------
                                                                         -------         -------         -------
</TABLE>

*   Reclassified--See Note 2U.

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

                                       4



<PAGE>

                                                Tambour Limited and Subsidiaries

Statement of Changes in Shareholders' Equity
--------------------------------------------------------------------------------

Adjusted to New Israel Shekels of December 1997

<TABLE>
<CAPTION>
                                                               PROCEEDS FROM                      COMPANY
                                   SHARE                           ISSUE         RETAINED     SHARES HELD BY
                                  CAPITAL         PREMIUM       OF WARRANTS      EARNINGS      SUBSIDIARIES        TOTAL
                               -------------   ------------    -------------  -------------   ---------------- --------------
                               NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS  NIS THOUSANDS    NIS THOUSANDS   NIS THOUSANDS
                              ---------------  --------------  -------------  --------------  ---------------  --------------
<S>                           <C>              <C>             <C>            <C>             <C>              <C>

Balance as at
 December 31, 1994                  97,307          203,609         25,133         195,452          --              521,501

Changes during 1995:

Expiration of warrants                --            *25,133       *(25,133)         --              --               --

Net income                            --               --             --            37,405          --               37,405

Dividend                              --               --             --           (23,689)         --              (23,689)
                                    ------          -------    -------------       -------          ------          -------

Balance as at
 December 31, 1995                  97,307          228,742          --            209,168          --              535,217

Changes during 1996

Net income                           --               --             --             35,877          --               35,877

Dividend**                           --               --             --            (96,763)         --              (96,763)

Company shares held by
  subsidiary                         --               --             --             --              (1,107)          (1,107)
                                    ------          -------    -------------       -------          ------          -------

Balance as at
 December 31, 1996                  97,307          228,742          --            148,282          (1,107)         473,224

Changes during 1997

Net income                           --               --             --             31,613          --               31,613

Dividend ***                         --               --             --            (63,307)         --              (63,307)
                                    ------          -------    -------------       -------          ------          -------

Balance at
 December 31, 1997                  97,307          228,742          --            116,588          (1,107)         441,530
                                    ------          -------    -------------       -------          ------          -------
                                    ------          -------    -------------       -------          ------          -------
</TABLE>

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

*   Net of issue and registration expenses, after tax effect.

**  Including dividend declared of NIS 53,494 thousand.

*** Including dividend declared subsequent to the balance sheet date of NIS
    44,842 thousand.


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

                                       5
<PAGE>

                                                Tambour Limited and Subsidiaries

Consolidated Statements of Cash Flows for the Year Ended December 31
--------------------------------------------------------------------------------

Adjusted to New Israel Shekels of December 1997

<TABLE>
<CAPTION>
                                                                      1997             1996              1995
                                                                 ------------      ------------     ------------
                                                                 NIS THOUSANDS     NIS THOUSANDS    NIS THOUSANDS
                                                                 -------------    --------------    -------------
<S>                                                              <C>             <C>                <C>

Cash flows from operating activities

Net income for the year                                                31,613            35,877           37,405

Reconciliation of net income to net cash provided by operating
  activities (a)                                                        6,400            59,793           29,774
                                                                      -------           -------          -------
Net cash provided by operating activities                              38,013            95,670           67,179
                                                                      -------           -------          -------
Cash flows from investing activities:

Acquisition of shares in an affiliated company that becomes a
  subsidiary (b)                                                       --                  (629)          (1,081)

Acquisition of shares of newly-consolidated subsidiary (c)             --               (47,304)           --

Additions to property, plant and equipment                            (34,694)          (42,639)         (44,172)

Proceeds from sale of property, plant and equipment                     1,941             3,281            2,273

Sales (Purchases) of marketable securities, net                         6,008            17,587           (3,944)

Investments in affiliated companies and others                         (6,106)             (239)            (800)

Proceeds (Payment) from sale of affiliate                                (135)             --                159

Loans to affiliated companies                                          --                (7,145)          (5,485)

Collections of loans to affiliated companies                           --                   425              800

Proceeds from sale of operations in subsidiary                         42,637             --              --

Long-term bank deposits and other long-term receivables                 4,789            81,839           42,268

Long-term bank deposits and long-term debt                              --              (20,044)          (4,673)

Acquisition of shares of subsidiary                                    (7,407)             (748)          (1,728)

Investment in intangible assets and deferred charges                    --                 (248)           --
                                                                      -------           -------          -------
Net cash provided by (used in) investment activities:                   7,033           (15,864)         (16,383)
                                                                      -------           -------          -------
Cash flows from financing activities:

Dividend distributed                                                  (71,959)          (43,269)         (36,479)

Dividend to minority in subsidiary                                       (713)          (10,023)          --

Increase (Decrease) in short-term bank credits, net                       329             6,877           (3,702)

Receipt of long-term debt                                               1,235             1,990            1,163

Repayment of long-term debt                                            (3,936)           (4,942)          (1,720)

Acquisition of company shares by subsidiary                            --                (1,107)          --

Proceeds from redemption of debentures in subsidiary                       69                71           --

Premium from the minority                                                  61              --             --
                                                                      -------           -------          -------
Net cash used in financing activities                                 (74,914)          (50,403)         (40,738)
                                                                      -------           -------          -------
Increase (Decrease) in cash and cash equivalents                      (29,868)           29,403           10,058

Balance of cash and cash equivalents at beginning of year              61,277            31,874           21,816
                                                                      -------           -------          -------

Balance of cash and cash equivalents at end of year                    31,409            61,277           31,874
                                                                      -------           -------          -------
                                                                      -------           -------          -------
</TABLE>

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

                                       6
<PAGE>

                                                Tambour Limited and Subsidiaries

Consolidated Statements of Cash Flows for the Year Ended December 31 (Cont'd)
--------------------------------------------------------------------------------

Adjusted to New Israel Shekels of December 1997



<TABLE>
<CAPTION>
                                                                         1997            1996            1995
                                                                    --------------  --------------  --------------
                                                                    NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS
                                                                    --------------  --------------  --------------
<S>                                                                 <C>             <C>             <C>

(a) Reconciliation of net income to net cash provided by operating
  activities

Income and expenses not involving cash flows:

Depreciation and amortization                                             30,637          34,458          29,188

Deferred taxes, net                                                        3,018          11,320             763

Increase in liability regarding termination of employee - employer
  relationship, net                                                        1,224             348             425

Minority interest in earnings of subsidiaries                              7,534           3,212             833

Equity in losses (earnings) of affiliated companies, net                    (766)            (30)            653

Income from sale of operations                                           (10,229)         --              --

Loss (Gain) on sale of affiliates                                              2             220            (159)

Capital gains, net                                                        (1,223)           (973)         (1,820)

Erosion of loans and long-term debt, net                                    (175)         (1,008)           (302)

(Increase) Decrease in value of marketable securities                     (2,984)           (164)            538

Increase in value of bank deposits                                        (1,063)         (1,919)         (2,959)

Changes in assets and liabilities:

(Increase) Decrease in accounts receivable--trade                        (21,767)          4,525         (19,437)

(Increase) Decrease in other receivables                                    (706)           (804)         28,629

(Increase) Decrease in inventories                                        (1,828)         20,674             185

Increase (Decrease) in accounts payable--trade                               935         (12,382)        (10,581)

Increase in other accounts payable                                         3,791           2,316           3,818
                                                                         -------         -------         -------
                                                                           6,400          59,793          29,774
                                                                         -------         -------         -------
                                                                         -------         -------         -------

(b) Acquisition of shares in an affiliated company that became a
  consolidated company *:

Assets and liabilities of the affiliated company as at the date of
  acquisition (net of cash):

Working capital (net of cash)                                             --               4,348          13,799

Fixed assets, net                                                         --               1,782          25,660

Deferred charges, net                                                     --              --                 695

Long-term liabilities                                                     --              --              (1,791)

Deferred Taxes                                                            --                  36          --

Goodwill created on acquisition                                           --                  48             857

Minority interest at date of acquisition                                  --              (2,669)        (19,047)
                                                                         -------         -------         -------

                                                                                           3,545          20,173

Investment on equity basis as at date of becoming a consolidated
  company                                                                 --              (2,916)        (19,092)
                                                                         -------         -------         -------
                                                                          --                 629           1,081
                                                                         -------         -------         -------
                                                                         -------         -------         -------
</TABLE>

------------------------
*   As follows:
    (1996)- Chemitas (1988) Ltd.
    (1995)- Serafon Resinous Chemicals Ltd.

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

                                       7

<PAGE>

                                                Tambour Limited and Subsidiaries

Consolidated Statements of Cash Flows for the Year Ended December 31 (Cont'd)
--------------------------------------------------------------------------------

Adjusted to New Israel Shekels of December 1997

<TABLE>
<CAPTION>
                                                                         1997             1996             1995
                                                                      -----------    ------------      ------------
                                                                     NIS THOUSANDS   NIS THOUSANDS     NIS THOUSANDS
                                                                    ---------------  --------------  -----------------
<S>                                                                 <C>              <C>             <C>
(c) Acquisition of shares in a newly consolidated subsidiary **:
Assets and liabilities of Kedem Chemicals Ltd. as at the date of
  acquisition (net of cash):
Working capital (net of cash)                                                --            35,337           --
Fixed assets, net                                                            --            21,445           --
Intangible assets, net                                                       --             1,062           --
Long term liabilities                                                        --            (7,344)          --
Goodwill at date of acquisition                                              --            15,788           --
Minority interest at date of acquisition                                     --           (18,984)          --
                                                                          ------          -------         -------
                                                                             --            47,304           --
                                                                          ------          -------         -------
                                                                          ------          -------         -------
** See Note 19G

(d) Significant non-cash transactions:
Long-term receivables on sale of fixed assets                                666           --              560
                                                                          ------          -------         -------
                                                                          ------          -------         -------
Fixed assets acquired under credit                                         1,584            1,170           --
                                                                          ------          -------         -------
                                                                          ------          -------         -------
Minority portion of dividend declared by a subsidiary                        --            --              263
                                                                          ------          -------         -------
                                                                          ------          -------         -------
Dividend declared                                                         44,842           53,307           --
                                                                          ------          -------         -------
                                                                          ------          -------         -------
</TABLE>

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

                                     8

<PAGE>


                                                                 Tambour Limited
Balance Sheets as at December 31
--------------------------------------------------------------------------------

Adjusted to New Israel Shekels of December 1997

<TABLE>
<CAPTION>
                                                                                         1997            1996
                                                                                    -------------   --------------
                                                                           NOTE     NIS THOUSANDS   NIS THOUSANDS
                                                                         ---------  --------------  --------------
<S>                                                                      <C>        <C>             <C>
Current assets
Cash and cash equivalents                                                                  6,052          52,077
Marketable securities                                                            3        49,172          55,806
Accounts receivable--trade                                                      4A        99,575          83,934
Other receivables                                                               4B        42,214          35,970
Bank deposits                                                                   5A        17,191           3,561
Inventories                                                                     6         80,821          73,898
                                                                                         -------         -------
                                                                                         295,025         305,246
                                                                                         -------         -------
Investments and long-term assets
Subsidiaries and affiliates                                                      7       119,805         106,711
Bank deposits and other receivables                                             5B         2,600          19,422
                                                                                         -------         -------
                                                                                         122,405         126,133
                                                                                         -------         -------
Property, plant and equipment                                                    8
Cost                                                                                     400,323         485,868
Less: Accumulated depreciation                                                           262,402         350,971
                                                                                         137,921         134,897
                                                                                         -------         -------
Intangible assets and deferred charges                                           9           147             189
                                                                                         -------         -------
                                                                                         555,498         566,465
                                                                                         -------         -------
                                                                                         -------         -------
</TABLE>


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

                                       9

<PAGE>

                                                Tambour Limited and Subsidiaries

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

<TABLE>
<CAPTION>
                                                                                             1997            1996
                                                                                        -----------      -----------
                                                                               NOTE     NIS THOUSANDS   NIS THOUSANDS
                                                                             ---------  --------------  --------------
<S>                                                                          <C>        <C>             <C>
Current liabilities
Bank credits                                                                        10        16,155             103
Accounts payable--trade                                                            11A        17,119          11,498
Other accounts payable                                                             11B        29,175          24,224
Dividend declared                                                                   22        45,000          53,494
                                                                                             -------         -------
                                                                                             107,449          89,319
                                                                                             -------         -------
Long-term liabilities
Liability regarding termination of employee--employer relationship, net             13         2,512           1,604
Capital notes issued to subsidiaries                                               12C         2,065           2,209
Deferred taxes, net                                                                17C         1,942             109
                                                                                             -------         -------
                                                                                               6,519           3,922
                                                                                             -------         -------
Liens, guarantees, contingencies and commitments                                    15
Shareholders' equity                                                                14
Share capital                                                                                 97,307          97,307
Paid-in capital                                                                              228,742         228,742
Retained earnings                                                                            116,588         148,282
                                                                                             -------         -------
                                                                                             442,637         474,331
Less: Company shares held by subsidiary                                                        1,107           1,107
                                                                                             -------         -------
                                                                                             441,530         473,224
                                                                                             -------         -------
                                                                                             555,498         566,465
                                                                                             -------         -------
                                                                                             -------         -------
</TABLE>

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


---------------------------------------------
Jacob Eshel-Acting Chairman

---------------------------------------------
Reuben Shulstein-Director and General Manager

March 6, 1998


                                       10
<PAGE>

                                                                 Tambour Limited

Statements of Income for the Year Ended December 31
--------------------------------------------------------------------------------

Adjusted to New Israel Shekels of December 1997

<TABLE>
<CAPTION>
                                                                           1997            1996            1995
                                                                      ------------    ------------     -----------
                                                             NOTE     NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS
                                                           ---------  --------------  --------------  --------------
<S>                                                        <C>        <C>             <C>             <C>
Revenue from sales                                               19A       440,398         446,279         466,907
Cost of sales                                                    19B       281,833         289,083         300,287
                                                                           -------         -------         -------
Gross profit                                                               158,565         157,196         166,620
                                                                           -------         -------         -------
Selling and marketing expenses                                   19C        90,164          78,039          77,969
General and administrative expenses                              19D        31,700          27,297          27,226
                                                                           -------         -------         -------
                                                                           121,864         105,336         105,195
                                                                           -------         -------         -------
Operating income                                                            36,701          51,860          61,425
Finance income (expense), net                                    19E         3,232          (1,659)            213
Other income, net                                                19F         2,016           3,001           2,157
                                                                           -------         -------         -------
Income before income taxes                                                  41,949          53,202          63,795
Income taxes                                                     17E        13,243          19,961          25,935
                                                                           -------         -------         -------
Net income after income taxes                                               28,706          33,241          37,860
Equity in earnings (losses) of subsidiaries and
  affiliates, net                                                            2,907           2,636            (455)
                                                                           -------         -------         -------
Net income for the year                                                     31,613          35,877          37,405
                                                                           -------         -------         -------
                                                                           -------         -------         -------
Earnings per NIS 1 par value of shares--in NIS:                  16
                                                                           -------         -------         -------
                                                                           -------         -------         -------
Primary and diluted earnings per share                                       0.52            0.59            0.62
                                                                           -------         -------         -------
                                                                           -------         -------         -------
</TABLE>

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

                                       11
<PAGE>

                                                                 Tambour Limited

Statements of Cash Flows for the Year Ended December 31
--------------------------------------------------------------------------------

Adjusted to New Israel Shekels of December 1997

<TABLE>
<CAPTION>
                                                                         1997            1996            1995
                                                                    -----------      ----------      ------------
                                                                    NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS
                                                                    --------------  --------------  --------------
<S>                                                                 <C>             <C>             <C>
Cash flows from operating activities:
Net income for the year                                                   31,613          35,877          37,405
Reconciliation of net income to net cash provided by operating
  activities (a)                                                          (3,114)         38,147          21,509
                                                                         -------         -------         -------
Net cash provided by operating activities                                 28,499          74,024          58,914
                                                                         -------         -------         -------
Cash flows from investing activities:
Purchases of property, plant and equipment                               (21,999)        (28,909)        (38,155)
Proceeds from sale of property, plant and equipment                          662           1,299           1,092
Sales (Purchases) of marketable securities, net                            9,563           7,257          (3,196)
Investments in affiliates and subsidiaries                                (7,732)        (53,866)         (3,659)
Proceeds from sale of affiliate                                              --           21,927             159
Loans to affiliates and subsidiaries                                      (4,707)         (9,536)         (8,288)
Long-term bank deposit and other long-term receivables                       --          (20,044)         (4,673)
Collections of loans to affiliates and subsidiaries                          194             883           5,063
Investment in capital notes of affiliates and subsidiaries                   --          (22,902)           --
Long-term bank deposits and long-term debt                                 4,559          81,698          42,154
Dividend received from affiliated subsidiaries' companies                    913          14,305            --
Investment in intangible assets                                              --             (232)           --
                                                                         -------         -------         -------
Net cash used in investment activities                                   (18,547)         (8,120)         (9,503)
                                                                         -------         -------         -------
Cash flows from financing activities:
Dividend distributed                                                     (72,029)        (43,269)        (36,479)
Increase (Decrease) in short-term bank credits, net                       16,052             (40)            127
                                                                         -------         -------         -------
Net cash used in financing activities                                    (55,977)        (43,309)        (36,352)
                                                                         -------         -------         -------
Increase (Decrease)in cash and cash equivalents                          (46,025)         22,595          13,059
Balance of cash and cash equivalents at beginning of year                 52,077          29,482          16,423
                                                                         -------         -------         -------
Balance of cash and cash equivalents at end of year                        6,052          52,077          29,482
                                                                         -------         -------         -------
                                                                         -------         -------         -------
</TABLE>

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

                                       12

<PAGE>
                                                                 Tambour Limited

Statements of Cash Flows for the Year Ended December 31 (cont'd)
--------------------------------------------------------------------------------

Adjusted to New Israel Shekels of December 1997

<TABLE>
<CAPTION>
                                                                        1997             1996             1995
                                                                     ----------       ----------      -----------
                                                                    NIS THOUSANDS    NIS THOUSANDS   NIS THOUSANDS
                                                                   ---------------  ---------------  --------------
<S>                                                                <C>              <C>              <C>
(a) Reconciliation of net income to net cash provided by
  operating activities
Income and expenses not involving cash flows;
Depreciation and amortization                                               19,241        22,749           22,812
Deferred taxes, net                                                          1,840         9,783              221
Increase in liability regarding termination of employee -
  employer relationship, net                                                   908           227              177
Equity in (earnings) losses of subsidiaries and affiliates,
  net                                                                       (2,907)       (2,636)             455
Loss (Gain) on sale of subsidiaries and affiliates                              --           220             (159)
Capital gains, net                                                            (402)         (778)            (879)
Erosion of loans and long-term debt, net                                      (266)         (521)             409
Increase in value of marketable securities                                  (2,929)         (698)            (210)
Increase in value of bank deposits                                          (1,063)       (1,919)          (2,959)
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable--trade                          (15,641)        1,257          (15,791)
(Increase) Decrease in other receivables                                    (5,060)        2,877           22,868
(Increase) Decrease in inventories                                          (6,923)       17,036           (1,562)
Increase (Decrease) in accounts payable--trade                               5,621        (8,837)          (7,577)
Increase (Decrease) in other accounts payable                                4,467          (613)           3,704
                                                                   ---------------        ------          -------
                                                                            (3,114)       38,147           21,509
                                                                   ---------------        ------          -------
                                                                   ---------------        ------          -------
(b) Non cash transactions:

Dividend Declared                                                           45,000        53,494             --
                                                                   ---------------        ------          -------
                                                                   ---------------        ------          -------
Fixed assets acquired under credit                                           1,536         1,052             --
                                                                   ---------------        ------          -------
                                                                   ---------------        ------          -------
</TABLE>

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

                                       13

<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 1--General

    Tambour Limited (hereafter "the Company") manufactures and markets a wide
range of paints and coating materials, and is also involved, through its
affiliated and subsidiary companies (hereafter the consolidation or the
group), in detergents and disinfectants for the institutional and retail
markets, in the treatment of water and waste, industrial oils the treatments
of metals and the production of emulsions, polymers additives for the
construction industry and printing inks.

Note 2--Reporting and Accounting Policies

A. Definitions

    In these financial statements--

    (1) Subsidiary--A company and partnerships whose financial statements are
        fully consolidated with those of the Company.

    (2) Affiliate--A company other than a consolidated company, including
        partnership which is included directly or indirectly, in the Company's
        financial statements on the equity basis.

    (3) Goodwill--The excess of the cost of an investment
        in shares over the adjusted balance sheet value at the date of
        acquisition.

    (4) Related parties--As defined in Opinion No. 29 of the Institute of
        Certified Public Accountants in Israel.

    (5) Interested parties--As defined in paragraph 1(1) of the Securities
        Law.

    (6) Index--The consumer price index published by the Central Statistics
        Institute.

B. Financial statements in adjusted values

    (1) The Company prepares its financial statements on a historical cost
        basis adjusted for changes in the general purchasing power
        of the Shekel (Note 21 presents condensed financial statement
        data of the Company in nominal values).

    (2) The adjusted values of non-monetary assets do not necessarily
        represent the value of those assets in the market or to the business,
        but rather their cost adjusted for the changes in the general
        purchasing power of the Shekel.

    (3) In the adjusted financial statements, the words "cost" and "equity"
        signify adjusted cost and adjusted equity.

    (4) All comparative figures from previous years (including monetary
        items) are adjusted to the index of the end of the current year.

                                       14

<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 2--Reporting and Accounting Policies (cont'd)

C. Principles of adjustment

    (1) The Balance Sheet

        Non-monetary items (mainly property, plant and equipment,
        inventories, share capital and paid-in capital) have been
        adjusted for the changes in the consumer price index from the
        month of execution of each transaction to the index published for
        the balance sheet month.

        Monetary items are presented in the adjusted balance sheet at nominal
        value.

        The value on equity basis of affiliated and subsidiary companies is
        determined on the basis of the adjusted financial statements of those
        companies.

        Deferred taxes, net, are calculated based on the adjusted data.

    (2) Statements of Income

        The items of the statements of income were adjusted according to the
        changes in the Consumer Price Index as follows:

        a.  Income and expenses deriving from non-monetary items (such as
            depreciation and amortization, changes in inventory, prepaid
            expenses and income, etc.) or from provisions included in the
            balance sheet (such as severance pay and vacation provision,
            etc.), were adjusted according to specific indices together with
            adjustment of the balance sheet item.

        b.  The remaining items of the statement of income (such as sales,
            purchases and production costs, etc.), other than the elements
            of finance income (expense), have been adjusted according to
            indices of the month the transactions were carried out.

        c.  The equity in the operating results of affiliated companies and
            the minority interest of consolidated subsidiaries operating
            results, were determined based on the adjusted financial
            statements of the respective companies.

        d.  Finance income (expense), net, which cannot be calculated
            separately, is derived from the other elements of the financial
            statements. The item contains, inter alia, amounts required to
            correct various items in the statement of income for the
            inflationary component of the finance expenses incorporated
            therein.

        e.  Income taxes--Current taxes consist of advance payments made
            during the year and amounts due at the balance sheet date (or net
            of amounts to be refunded as of the balance sheet date). The
            advance payments are adjusted on the basis of the index at the
            time of each payment, while the amounts due (or refund due) are
            not adjusted. Therefore, the current taxes include the expense
            resulting from the erosion in value of the payments on account of
            income taxes from payment date to the balance sheet date.
            Deferred taxes--see Notes 2K and 17C


                                       15
<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 2--Reporting and Accounting Policies (cont'd)

C. Principles of adjustment (cont'd)

    (3) Statement of Changes in Shareholders' Equity

        Dividends declared and paid during the year are adjusted based on the
        index of the month of payment. Dividends declared during the year but
        not yet paid as of the balance sheet date are not adjusted.

        The erosion of a dividend declared during the prior year which pertains
        to the period from the beginning of the current year through the date
        the dividend was actually paid, is presented as a reduction of the
        current year's dividend.

D. Consolidation of the financial statements

    (1) The consolidated financial statements include the financial
        statements of the Company and its subsidiaries.

        A list of the companies whose financial reports are included in the
        consolidated financial statements and the extent of ownership and
        control of them, appears in the Appendix to the financial statements.

    (2) Goodwill represents the excess of acquisition cost of the investment
        in subsidiaries over the fair value of the identifiable assets less
        the fair value of the identifiable liabilities (after recording
        deferred taxes from temporary differences) upon acquisition.

    (3) The excess of acquisition cost ascribed to assets and liabilities is
        included in the appropriate balance sheet items.

    (4) Goodwill is included in the Consolidated Balance Sheet as part of
        "Intangible assets and deferred charges" and is amortized on a
        straight-line basis over 10 years. Such balances pertaining to
        acquisitions prior to 1995 are amortized over five years.

    (5) All intercompany balances, transactions and income from intercompany
        sales not yet realized outside the group--have been eliminated.

E. Investments in subsidiaries, affiliates and partnerships

    (1) Investments in companies and partnerships are included on the equity
        basis which, according to management, does not exceed their fair
        value.

    (2) In calculating the company's share in equity, anticipated losses from
        the redemption of convertible securities issued by subsidiaries are
        taken into consideration if redemption or conversion is considered
        probable. No such losses have been included in these financial
        statements since the redemption or conversion of these securities is
        not considered probable.


                                       16

<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 2--Reporting and Accounting Policies (cont'd)

E. Investments in subsidiaries, affliates and partnerships (cont'd)

    (3) Income from sales not yet realized outside the group have been
        eliminated.

    (4) Amortization of goodwill--see note 2D(4)

F. Cash and cash equivalents

    Cash and cash equivalents include short-term deposits in banks for an
    original period of up to three months.

G. Inventories

    Inventories are carried at the lower of cost or market value. The cost is
    determined mainly as follows:

    Raw materials and packaging materials--moving average method.

    Finished products--based on computed costs of production, including raw
    materials, packaging materials, labor and fringe benefits and other
    production costs.

    Work in progress--based on raw materials plus actual production costs.

H. Allowance for doubtful accounts

    The financial statements include allowances for doubtful accounts that
    reflect fairly, based upon management's estimation, the losses included
    in accounts receivable, the collection of which is doubtful.

    The allowance for doubtful accounts is computed mainly at the rate of
    8.5% of the open balances of accounts receivable and, in small part
    specifically for accounts which are, in management opinion, doubtful.
    Accounts receivable that, in management's opinion, are uncollectible, are
    written-off.

I. Marketable securities

    Short-term marketable securities are presented on the basis of their
    market value on the balance sheet date.

    The changes in their value are included in the statement of income.


                                       17

<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 2--Reporting and Accounting Policies (cont'd)

J. Property, plant and equipment

    (1) Property, plant and equipment are presented at cost.

    (2) The cost of assets for which an investment grant was
        received is reflected net of the amount of the grant.

    (3) Improvements are added to the cost of assets, while maintenance and
        repair expenses are expenses as incurred.

    (4) Depreciation is computed on the straight-line method, based on the
        estimated useful lives of the assets.

        Annual depreciation rates:

<TABLE>
<CAPTION>
                                                               %
                                                           ---------
       <S>                                                 <C>
       Buildings                                                5-10
       Machinery and equipment                                  5-20
       Motor vehicles                                          15-20
       Computers                                               20-33
       Furniture and office equipment                          6-100
       Leasehold improvements                           .       6-20
</TABLE>

    (5) Assets leased by capital lease are presented as Company assets at
        their normal purchase price (without the financing element), and
        depreciated at the accepted rates for such assets. Lease amounts
        payable in coming years, after deduction of the inherent finance
        element, are included in liabilities. The interest on these amounts
        is accrued currently and included in the statement of income.

    (6) Land lease from The Israel Land Registry is amortized over the period
        of the lease.

    (7) Some property, plant and equipment has been reduced to realization
        value.

K. Deferred taxes

    Companies in the group regulate the tax burden for timing differences of
    expense and income items between accounting and income tax purposes,
    additions from inventory adjustment and the adjustment element of
    depreciable assets not recognized for tax purposes.

    The amount deferred each year is computed according to the liabilities
    approach at the tax rates that will be applicable upon utilization of the
    deferred taxes or upon realization of the tax benefits, as known at the
    time of approval of the financial statements by the Board of Directors.

    Both the consolidated balance sheet and the balance sheet of the Company
    include deferred tax assets, the realization of which is dependent upon
    the existence of taxable income in future years. In management's
    estimation, these deferred tax assets are realizable in the future.


                                       18
<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 2--Reporting and Accounting Policies (cont'd)

K. Deferred taxes (cont'd)

    Deferred taxes included in current assets pertain to current items
    (inventory, provisions for vacation, etc.). Deferred taxes included in
    "Investments and long-term debit balances" and in "Long-term liabilities"
    pertain to items that are not current (property, plant and equipment,
    liability regarding termination of employee-employer relationship etc.).

    The main factors in respect of which deferred taxes are not computed are as
    follows:

    a.  Adjustment amounts for changes in the purchasing power of the Shekel
        pertaining to private motor vehicles, under the rules determined by
        the Institute of Certified Public Accountants in Israel.

    b.  Investments in subsidiaries and affiliates, since the Company
        intends to hold such investments and not sell them.

    c.  Timing differences, net, for which a tax asset should be created but
        the possibility of realization of the benefit is in doubt.

    d.  Accumulated losses for tax purposes of a subsidiary.

L. Intangible assets and deferred charges, net

    (1) Know-how and patent rights, manufacturing and distribution rights and
        foundation costs--are stated at amortized cost and amortized on the
        straight-line basis over 5-8 years upon commencement of their
        utilization over their anticipated period benefits.

    (2) Goodwill of subsidiaries is presented at amortized cost and is
        amortized in equal annual installments over 10 years.

    (3) Issue costs of convertible debentures of a subsidiary are amortized
        in equal annual installments through the date of redemption of the
        debentures.

    (4) The book value of the intangible assets and deferred charges does not
        exceed their economical value as of the balance sheet date.

M. Convertible debentures

    Convertible debentures are included based on tests of probability of
    conversion, as determined under Opinion No. 53 of the Institute of
    Certified Public Accountants in Israel. Convertible debentures whose
    conversion is not considered probable are reflected under long-term
    liabilities at the value of the liability as of the balance sheet date.

N. Earnings per share

    Earnings per share are computed in accordance with Opinion No. 55 of the
    Institute of Certified Public Accountants in Israel.

    The computation of primary earnings per share takes into account warrants
    issued by the Company if their exercise is reasonable according to the
    tests provided in the above Opinion.

                                       19

<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 2--Reporting and Accounting Policies (cont'd)

N. Earnings per share (cont'd)

    Computation of the diluted earnings per share takes into account
    convertible securities issued by the Company and by a subsidiary that
    were not included in the computation of the primary earnings per share,
    if their exercise does not lead to an increase in earnings per share
    (anti-dilutive effect).

O. Foreign currency and linkage

    (1) Assets (other than securities) and liabilities denominated in or
        linked to a foreign currency are stated at the representative
        exchange rates published by the Bank of Israel on the balance sheet
        date.

        Assets (other than securities) and liabilities linked to the
        Consumer Price Index are stated at the linkage terms determined for
        each balance.

    Data on Consumer Price Indices and exchange rates:

<TABLE>
<CAPTION>
                                                 December 31                 Percentage of Change
                                       -------------------------------  -------------------------------
<S>                                    <C>        <C>        <C>        <C>        <C>        <C>
                                         1997       1996       1995       1997       1996       1995
                                       ---------  ---------  ---------  ---------  ---------  ---------
CPI in points                              153.1      143.1      129.4       6.99      10.59       8.10
                                       ---------  ---------  ---------  ---------  ---------  ---------
                                       ---------  ---------  ---------  ---------  ---------  ---------
U.S. dollar exchange rate                  3.536      3.251      3.135      12.79       3.70       3.88
                                       ---------  ---------  ---------  ---------  ---------  ---------
                                       ---------  ---------  ---------  ---------  ---------  ---------
</TABLE>

    (2) Income and expenses in foreign currency are included in the nominal
        statements of income in the relevant line items at the exchange rates
        in effect at the time of their occurrence.

    (3) Exchange rates and linkage differences occurring as a result of the
        adjustment of foreign currency or CPI-linked assets and liabilities,
        appear in the nominal statements of income in the relevant line items
        upon their occurrence.

P. Financial Instruments

    (1) The fair value of financial instruments (bank deposits, long-term
        liabilities and the components of working capital except inventory
        and deferred taxes) is not materially different from their book value
        as of the balance sheet date. Financial instruments are presented at
        book value as at the balance sheet date.

    (2) Foreign exchange forward contracts--results are included in the
        statement of Income as they occur. The amounts of foreign exchange
        forward contract during the period of these financial statements is
        immaterial.

Q. Liability regarding termination of employee-employer relationship

    The liability of the Company and its affiliates and subsidiaries
    regarding the termination of employee-employer relationship is covered by
    provisions for severance indemnities, deposits in approved pension and
    severance funds and managers' insurance policies.


                                       20
<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 2--Reporting and Accounting Policies (cont'd)

R. Research and development expenses

    Research and development costs are expensed as incurred.

S. Erosion of capital notes

    The erosion of unlinked capital notes bearing no interest which were
    issued by the Company to subsidiaries or vice versa, is recorded directly
    to additional paid-in capital and not to the Statement of Income.

T. Use of estimates

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

U. Reclassification--Discontinued Operations

    (1) The operations of a subsidiary, Kedem Chemicals Ltd.
        (hereafter--Kedem), in the retail detergents field (hereafter -
        Fantastik operations) were sold during 1997 (see Note 7E(1)).

        In accordance with generally accepted accounting principles, the
        Statement of Income figures pertaining to the Fantastik operations
        which have been discontinued and are included in the prior year's
        comparative figures, have been reclassified to a separate line in the
        Consolidated Statement of Income in order to reflect the results of
        the group from continuing operations and in order to present the
        results of discontinued operations separately (see Note 19G).

        The Statement of Income comparative figures have been reclassified
        as of January 1996 when control over Kedem was acquired by the
        Company.

    (2) The comparative figures of industrial and institutional detergents
        operations have not been reclassified as a discontinued operation
        since Kedem holds a substantial part (49.9%) (the group-- 38.75%) of
        the affiliated company that will continue these operations. The
        results of these operations will be presented in the coming years in
        the line "Equity in income of affiliated companies, net" (see Note
        7E(2)).


                                       21
<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 3--Marketable Securities

<TABLE>
<CAPTION>
                                                                 Consolidated                  The Company
                                                         ----------------------------  ----------------------------
                                                         December 31,   December 31,   December 31,   December 31,
Consist of:                                                  1997           1996           1997           1996
                                                         -------------  -------------  -------------  -------------
                                                            Adjusted NIS thousands        Adjusted NIS thousands
<S>                                                      <C>            <C>            <C>            <C>
Shares                                                           140             11            140             11
Participation certificates in mutual funds                     9,290          9,420          9,290          9,420
Debentures                                                   *43,352         46,375         39,742         46,375
                                                              ------         ------         ------         ------
                                                              52,782         55,806         49,172         55,806
                                                              ------         ------         ------         ------
                                                              ------         ------         ------         ------
</TABLE>

*   Includes government convertible debentures in a subsidiary in the amount of
    NIS 3,610 thousand deposited in the name of a trustee for the benefit of the
    owners of the convertible debentures of the subsidiary. This deposit was
    created upon removal of a floating lien on these debentures. Upon payment of
    the convertible debentures in 1998, the deposit will be transferred to the
    subsidiary's name.


                                       22
<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 4--Accounts Receivable--Trade and Others

    Consist of:
<TABLE>
<CAPTION>
                                                                Consolidated                 The Company
                                                         --------------------------  ---------------------------
                                                         December 31,  December 31,  December 31,  December 31,
                                                             1997          1996          1997          1996
                                                         ------------  ------------  ------------  -------------
                                                           Adjusted NIS thousands       Adjusted NIS thousands
<S>                                                      <C>           <C>           <C>           <C>
A. Trade
   Open accounts                                             129,298       120,134        68,023        61,649
   Checks receivable                                          54,409        46,461        27,569        20,226
   Related and interested parties                              7,376         4,842         9,440         8,005
   Income receivable                                           7,742         7,285           268           757
                                                         ------------  ------------  ------------       ------
                                                             198,825       178,722       105,300        90,637
   Less: Allowances for doubtful accounts                     11,710        12,442         5,725         6,703
                                                         ------------  ------------  ------------       ------
                                                             187,115       166,280        99,575        83,934
                                                         ------------  ------------  ------------       ------
                                                         ------------  ------------  ------------       ------
B. Others
   Advance payments of income taxes less provision            13,733        10,996         8,024         8,121
   Advances to suppliers                                       1,090           718           150           388
   Affiliates and subsidiaries                                    10            27        19,706        14,738
   Government institutions                                       787           196           468            62
   Deferred taxes, net (I)                                     6,566         7,019         4,599         4,606
   Employees                                                      98           172        --                52
   Prepaid expenses                                            2,151         2,472           913           966
   Short-term loans (II)                                          --           766         7,256         5,400
   Current maturities of other long-term receivables             424           533           291           401
   Other receivables                                           1,139         2,996           557         1,236
   Income receivable                                             385        --               250        --
                                                         ------------  ------------  ------------       ------
                                                              26,383        25,895        42,214        35,970
                                                         ------------  ------------  ------------       ------
                                                         ------------  ------------  ------------       ------
</TABLE>

(I) See Note 17C

(II) December 31, 1997--in the Company, including a loan to a consolidated
     company in the amount of NIS 7,256 thousand, unlinked, at prime less 1%
     (December 31, 1996--NIS 4,727 thousand, unlinked, at 15.2% interest p.a.)


                                       23
<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 5--Bank Deposits and Other Receivables

Balances on linkage and interest rate basis:

<TABLE>
<CAPTION>
                                         Annual Interest
                                           Rates as of          Consolidated                    The Company
                                           December 31    ----------------------------  ----------------------------
                                              1997        December 31,   December 31,   December 31,   December 31,
                                                %             1997           1996           1997           1996
                                         ---------------  -------------  -------------  -------------  -------------
                                                           Adjusted NIS thousands        Adjusted NIS thousands

<S>                                      <C>              <C>            <C>            <C>            <C>
A. Included in current assets

Current maturities of long-term bank
  deposits                                                     17,191          3,561         17,191          3,561
                                                               ------         ------         ------         ------
                                                               ------         ------         ------         ------
B. Included in investments and
  long-term assets

Deposit in a commercial bank linked to
  the index                                       4.6           8,849          8,752          8,849          8,752

Deposit in a mortgage bank linked to
  the index                                   3.1-5.3           8,342         11,393          8,342         11,393

Other receivables linked to the
  index                                         0-5.1           3,401          3,876          2,891          3,239

Other receivables linked to the
  dollar                                                          568              --             --            --
                                                               ------         ------         ------         ------
                                                               21,160         24,021         20,082         23,384
Less--current maturities of bank
  deposits                                                     17,191          3,561         17,191          3,561

Current maturities of other
  receivables                                                     424            533            291            401
                                                               ------         ------         ------         ------
                                                                3,545         19,927          2,600         19,422
                                                               ------         ------         ------         ------
                                                               ------         ------         ------         ------
Maturity Dates:
Second year                                                       901         17,016            552         16,885
Third year                                                        694            395            287            302
Fourth year                                                       395            395            301            302
Fifth year                                                        411            395            316            302
Thereafter                                                      1,144          1,726          1,144          1,631
                                                               ------         ------         ------         ------
                                                                3,545         19,927          2,600         19,422
                                                               ------         ------         ------         ------
                                                               ------         ------         ------         ------
</TABLE>


                                       24

<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 6--Inventories

    Consist of:
<TABLE>
<CAPTION>
                                                                Consolidated                 The Company
                                                         --------------------------  ----------------------------
                                                         December 31,  December 31,  December 31,   December 31,
                                                             1997          1996          1997           1996
                                                         ------------  ------------  -------------  -------------
                                                           Adjusted NIS thousands       Adjusted NIS thousands
<S>                                                      <C>           <C>           <C>            <C>
Finished products                                             45,793        46,646        32,809         28,397
Work-in-process                                                9,419         5,563         9,374          5,561
Raw material and packing materials                            47,315        53,534        36,323         35,626
In transit                                                     2,747         5,132         2,315          4,314
                                                         ------------  ------------       ------         ------
                                                             105,274       110,875        80,821         73,898
                                                         ------------  ------------       ------         ------
                                                         ------------  ------------       ------         ------
</TABLE>

Note 7--Subsidiaries and Affiliates

A. Consolidated subsidiaries

<TABLE>
<CAPTION>
                                                                                            The Company
                                                                                     --------------------------
                                                                                     December 31,  December 31,
                                                                                         1997          1996
                                                                                     ------------  ------------
                                                                                       Adjusted NIS thousands
<S>                                                                                  <C>           <C>
Investment on equity basis, loans and capital notes
Balance of investments as at December 31, 1991                                            16,852        16,852
Additions, at cost                                                                        67,384        59,652
Dividend from subsidiaries                                                               (15,547)      (14,634)
Share in accumulated income net since January 1, 1992                                     10,181         8,977
Erosion of capital notes                                                                   1,507        --
Affiliate that became a consolidated subsidiary                                            7,802         7,802
Reductions                                                                               (21,927)      (21,927)
Company shares held by subsidiary                                                         (1,107)       (1,107)
                                                                                     ------------  ------------
Balance of investments at end of year (I)                                                 65,145        55,615
Capital notes (II)                                                                        23,627        25,278
Long-term loans and debit balances (see C below)                                           9,086         4,541
                                                                                     ------------  ------------
                                                                                          97,858        85,434
                                                                                     ------------  ------------
                                                                                     ------------  ------------
</TABLE>

(I)  Including deferred credit not yet fully amortized--see note 9.

(II) Unlinked, bearing no interest


                                       25

<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 7--Subsidiaries and Affiliates (cont'd)

B. Affiliates



<TABLE>
<CAPTION>
                                                               Consolidated                   The Company
                                                      ------------------------------  ----------------------------
                                                      December 31,    December 31,    December 31,   December 31,
                                                          1997            1996            1997           1996
                                                      ------------  ----------------  -------------  -------------
                                                          Adjusted NIS thousands          Adjusted NIS thousands
<S>                                                   <C>           <C>               <C>            <C>
Investment on equity basis, loans and capital notes
Balance of investments as at December 31, 1991             10,942         10,942            803            803
Additions at cost (I)                                      25,982         16,230         11,728         11,728
Share in accumulated loss, net, since 1.1.92 (I)             (532)          (954)          (675)        (1,305)
Reductions                                                    258           (157)          (157)          (157)
                                                      ------------       -------         ------         ------
Balance at end of year                                     36,650         26,061         11,699         11,069
Less: affiliate that became a consolidated
  subsidiary                                              (23,097)       (23,097)        (7,802)        (7,802)
                                                      ------------       -------         ------         ------
Balance at end of year                                     13,553          2,964          3,897          3,267
Capital notes (II)                                           --              160         --             --
Long-term loans and debit balances (see E below)           18,050         18,133         18,050         18,010
                                                      ------------       -------         ------         ------
                                                           31,603         21,257         21,947         21,277
                                                      ------------       -------         ------         ------
                                                      ------------       -------         ------         ------
</TABLE>

(I) Including partnerships.

(II) Unlinked, bearing no interest.

C. Long-term loans and debit balances

<TABLE>
<CAPTION>
                                                                  December 31, 1997         December 31, 1996
                                                               ------------------------  ------------------------
                                                                Linked to    Linked to    Linked to    Linked to
                                                                  Index        Index        Index        Index
                                                                   0%           5 %          0%           5 %
                                                               -----------  -----------  -----------  -----------
                                                                Adjusted NIS thousands    Adjusted NIS thousands
<S>                                                            <C>          <C>          <C>          <C>
Consolidated
Long-term loans and debit balances (I)                             11,796        6,254       12,998        5,135
                                                               -----------       -----   -----------       -----
                                                               -----------       -----   -----------       -----
The Company
Long-term loans and debit balances (I)                             20,882        6,254       17,416        5,135
                                                               -----------       -----   -----------       -----
                                                               -----------       -----   -----------       -----
</TABLE>

(I) No due date


                                        26

<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 7--Subsidiaries and Affiliates (Cont'd)

D. Securities listed for trading

<TABLE>
<CAPTION>
                                                                             December 31, 1997       December 31, 1996
                                                                           ----------------------  ----------------------
                                                                            Market     Carrying     Market     Carrying
                                                                             Value       Value       Value       Value
                                                                           ---------  -----------  ---------  -----------
                                                                           Adjusted NIS thousands  Adjusted NIS thousands
<S>                                                                        <C>        <C>          <C>        <C>
Includes share of sub-company traded
  on the Tel-Aviv Stock Exchange                                             48,687      67,010      37,444      56,751
                                                                           ---------  -----------  ---------  -----------
                                                                           ---------  -----------  ---------  -----------
</TABLE>

E.  (1) In September 1997, a subsidiary, Kedem, signed an agreement with a
        company in the Unilever group for the sale of a group of products
        under the brand name "Fantastik" under which the ownership of the
        goodwill, brandnames, know-how, distribution system and part of its
        fixed assets and inventory will be transferred to Lever Israel Ltd.
        of the Unilever group (hereafter--Lever), for NIS 35 million. Kedem's
        activities relating to the "Fantastik" products constituted
        approximately 45% of Kedem's overall activities.

        Details regarding the income from this discontinued operation -see
        Note 19G.

    (2) In addition to the aforementioned in paragraph (1) above, on the same
        date, the Company and Kedem signed an agreement with Lever to jointly
        create a new company -Diverseylever Israel Ltd.
        (hereafter--Diverseylever) under which the companies will consolidate
        their operations in Israel in the institutional and industrial
        chemical, detergent and disinfectant fields. In addition, Lever
        Israel Ltd. transferred its operations in this field to
        Diverseylever.

        Kedem received approximately NIS 13.9 million for the
        transfer of operations and related assets (fixed assets and
        inventory) to the new company. Upon the conclusion of the agreement,
        Kedem holds 49.9% and the Unilever group holds 50.1% of the shares of
        Deverseylever. Details regarding the results of the deal--see Note
        19F.

F.  In September 1997, the courts granted a request to merge the subsidiaries
    Italchem Ayalon Ltd and Aniam Purification Systems Ltd. into Chemitas
    (1988) Ltd. (hereafter--Italchem, Aniam and Chemitas, respectively).

    Other authorizations necessary for the merger were received prior to
    that, as follows: the income tax authorities, the Controller of
    Restrictive Practices, and the Investment Center. According to the merger
    agreement, the merger date is December 31, 1996. In addition, according
    to this agreement, the assets and liabilities of Italchem and Aniam would
    be transferred to Chemitas in exchange for regular share capital allotted
    to the shareholders of the merging companies.

    Chemitas' name was changed, after the merger, to Tambour Ecology Ltd.
    The effect of the merger, included in the financial statements,
    is not material.

                                       27

<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 8--Property, Plant and Equipment

A. Consist of:

<TABLE>
<CAPTION>
                                                        Machinery     Furniture    Computers
                                           Land and        and       and Office       and          Motor
                                          Buildings     Equipment     Equipment   Peripherals     Vehicles       Total
                                          ----------   ------------  -----------  -----------   ------------  -----------
                                                                           Adjusted NIS thousands
<S>                                       <C>          <C>           <C>          <C>           <C>           <C>
Cost:
Balance--January 1, 1997                    198,298        343,350      24,287      20,585       30,390          616,910
Additions during the year                     8,292         15,071       1,689       2,901        7,421    (1)    35,374
Reductions during the year                     (339)       (96,451)     (9,793)    (10,869)      (4,663)   (5)  (122,115)
Accrued for decrease in value                --              1,000      --           --             --     (6)     1,000
                                          ----------   ------------  -----------  -----------  -----------  -------------
Balance--December 31, 1997                  206,251(4)     260,970      16,183      12,617       33,148          529,169
                                          ----------   ------------  -----------  -----------  -----------  -------------
                                          ----------   ------------  -----------  -----------  -----------  -------------
Accumulated depreciation
 and amortization:
Balance--January 1, 1997                    109,933        254,694      17,453      17,687        15,534         415,301
Additions during the year                     5,211         16,321       1,998       1,110         4,544          29,184
Reductions during the year                     (128)       (92,910)    (10,178)    (10,869)       (3,303)    (5)(117,388)
                                          ----------   ------------  -----------  -----------  -----------  -------------
Balance--December 31, 1997                  115,016        178,105       9,173       7,928        16,775         327,097
                                          ----------   ------------  -----------  -----------  -----------  -------------
                                          ----------   ------------  -----------  -----------  -----------  -------------
Depreciated balance:
December 31, 1997                         (3) 91,235         82,865       6,910        4,689     (2)16,373        202,072
                                          ----------   ------------  -----------  -----------  -----------  -------------
                                          ----------   ------------  -----------  -----------  -----------  -------------
Depreciated balance:
December 31, 1996                         (3) 88,365         88,656        6,834        2,898     (2)14,856       201,609
                                          ----------   ------------  -----------  -----------  -----------  -------------
                                          ----------   ------------  -----------  -----------  -----------  -------------
</TABLE>

(1) In the company and consolidation, includes advance payments of NIS 1,604
    thousand (December 31, 1996--NIS 321 thousand).

(2) Includes depreciated balance of motor vehicles acquired by capital lease in
    the amount of NIS 1,283 thousand (December 31, 1996--NIS 747 thousand).
    Subsequent to the balance sheet date, motor vehicles were sold to an
    affiliate at depreciated cost of NIS 1,095 thousand. At the same time, the
    liability, regarding the aforementioned lease, was transferred to the
    affiliate.

(3) Includes depreciated balance of leasehold improvements in the amount of NIS
    3,777 thousand. (December 31, 1996--NIS 2,567 thousand).

(4) Net of NIS 811 thousand investment grants received by a subsidiary. To
    guarantee the terms related to receiving the grant, a lien in favor of the
    State of Israel was secured on all the assets for which the grant was
    received. If the abovementioned company does not meet the terms related to
    the receipt of the grant, it will have to return the amount of the grant
    in addition to interest from the date it was received.

(5) Includes the write-off of fully depreciated property, plant and equipment in
    the amount of NIS 112,481 thousand.

(6) In a subsidiary, as a result of discontinued operations, see notes 7E and
    19G.


                                       28

<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 8--Property, Plant and Equipment (cont'd)

The Company

<TABLE>
<CAPTION>
                                                        Machinery    Furniture    Computers
                                            Land and       and      and Office       and        Motor
                                            Buildings   Equipment    Equipment   Peripherals  Vehicles      Total
                                            ---------  -----------  -----------  -----------  ---------  -----------
                                                                          Adjusted NIS thousands
<S>                                         <C>        <C>          <C>          <C>          <C>        <C>
Cost
Balance--January 1, 1997                      163,865     274,045       16,843       18,468     12,647       485,868
Additions during the year                       5,630       9,913          845   (1)  2,531      3,564        22,483
Reductions during the year                     --         (86,921)      (8,465)     (10,869)    (1,773)  (3) (108,028)
                                            ---------  -----------  -----------  -----------  ---------  -------------
Balance--December 31, 1997                    169,495     197,037        9,223       10,130      14,438       400,323
                                            ---------  -----------  -----------  -----------  ---------  -------------
                                            ---------  -----------  -----------  -----------  ---------  -------------
Accumulated depreciation and amortization:
Balance--January 1, 1997                       98,580     217,414       12,504       15,976       6,497       350,971

Additions during the year                   (2) 4,264      10,871        1,315          839       1,910        19,199
Reductions during the year                     --         (86,921)      (8,465)     (10,869)     (1,513) (3) (107,768)
                                            ---------  -----------  -----------  -----------  ---------  -------------
Balance--December 31, 1997                   102,844     141,364        5,354        5,946       6,894       262,402
                                            ---------  -----------  -----------  -----------  ---------  -------------
                                            ---------  -----------  -----------  -----------  ---------  -------------
Depreciated balance:
December 31, 1997                             66,651      55,673        3,869        4,184       7,544       137,921
                                            ---------  -----------  -----------  -----------  ---------  -------------
                                            ---------  -----------  -----------  -----------  ---------  -------------
Depreciated balance:
December 31, 1996                             65,285      56,631        4,339        2,492       6,150       134,897
                                            ---------  -----------  -----------  -----------  ---------  -------------
                                            ---------  -----------  -----------  -----------  ---------  -------------
</TABLE>

(1) Includes advance payments of NIS 1,236 thousand (December 31, 1996--NIS 321
    thousand).

(2) In both the Company and consolidated figures, includes amortization of land
    lease rights in the amount of NIS 26 thousand.

(3) Includes the write-off of fully depreciated property, plant and equipment in
    the amount of NIS 106,059 thousand.

B.  (1) Part of the land and buildings in the amount of NIS 318 thousand is
        registered in the Land Registry Office in the name of a wholly-owned
        subsidiary.

    (2) NIS 1,273 thousand represents approximately 50,000 sq.m. of land,
        registered in the Land Registry in the name of a wholly-owned
        subsidiary, leased for a period of 49 years which expires in the year
        2,039. Beginning in 1993, these land lease rights are being amortized
        over the remaining lease period.

C. For information relating to liens and commitments on property, plant and
   equipment, see Note 15.


                                       29


<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 9--Intangible Assets, Net

Consists of:

Consolidated
<TABLE>
<CAPTION>
                                                                                     Amortization         Amortized Balance
                                                                       Transfer to   Pertaining to  ------------------------------
                                                        Accumulated    Investment      Realized      December 31,    December 31,
                                              Cost     Amortization   in Affiliates  Operations *        1997            1996
                                            ---------  -------------  -------------  -------------  ---------------  -------------
                                                             Adjusted NIS Thousands                    Adjusted NIS Thousands
<S>                                         <C>        <C>            <C>            <C>            <C>              <C>
Goodwill, net                                  15,070          909          2,473         10,367           1,321          14,602
Know-how production and
  distribution rights                             780          588           --               38             154             356
Debentures issue cost                             165          148           --             --                 1              70
Foundation costs                                  712          701           --             --                11              17
                                            ---------        -----          -----         ------           -----          ------
                                               16,727        2,346          2,473         10,405           1,503          15,045
                                            ---------        -----          -----         ------           -----          ------
                                            ---------        -----          -----         ------           -----          ------
</TABLE>

The Company
<TABLE>
<CAPTION>
                                                                                            Amortized Balance
                                                                                   ------------------------------------
                                                                    Accumulated      December 31,       December 31,
                                                       Cost        Amortization          1997               1996
                                                    -----------  ---------------  -----------------  -----------------
                                                      Adjusted NIS Thousands              Adjusted NIS Thousands
<S>                                                 <C>          <C>              <C>                <C>
Distribution rights                                     232                85                147            189
                                                        ---               ---                ---           ---
                                                        ---               ---                ---           ---
</TABLE>

* See Note 7E.


                                       30
<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 10--Bank Credits and Others

Balances on linkage and interest rate basis:

<TABLE>
<CAPTION>
                                                       Annual
                                                      Interest
                                                    Rates as of            Consolidated                    The Company
                                                    December 31,   ----------------------------  -----------------------------
                                                        1997       December 31,   December 31,   December 31,     December 31,
                                                         %             1997           1996           1997             1996
                                                   --------------  -------------  -------------  -------------  --------------
                                                                      Adjusted NIS Thousands          Adjusted NIS Thousands
<S>                                                <C>             <C>            <C>            <C>            <C>
Bank credit in Israeli currency, unlinked              12.5-17.9          1,944          5,723            286              103
Short-term loans unlinked                                   15.7          2,250         13,909             --               --
Bank credit of foreign currency                             3.25          1,578          1,680             --               --
Short-term bank loans, linked to the index                  4.35         15,869         --             15,869               --
Current portion of long-term loans                         1,559            647         --                 --
Current portion of convertible debentures                      2          3,195          3,252             --               --
                                                   --------------  -------------  -------------  -------------  --------------
                                                         26,395         25,211         16,155             103               --
                                                   --------------  -------------  -------------  -------------  --------------
                                                   --------------  -------------  -------------  -------------  --------------
</TABLE>

Note 11--Accounts Payable--Trade and Others
<TABLE>
<CAPTION>
                                                                 Consolidated                  The Company
                                                         ----------------------------  ----------------------------
                                                         December 31,   December 31,   December 31,   December 31,
                                                             1997           1996           1997           1996
                                                         -------------  -------------  -------------  -------------
                                                            Adjusted NIS Thousands        Adjusted NIS Thousands
<S>                                                      <C>            <C>            <C>            <C>
A. Accounts payable--Trade and services
Open accounts                                                 27,976         26,608         12,485         10,097
Related parties                                                4,150          1,152          4,459          1,152
Checks payable                                                 7,318         10,851            175            249
                                                              ------         ------         ------         ------
                                                              39,444         38,611         17,119         11,498
                                                              ------         ------         ------         ------
                                                              ------         ------         ------         ------
B. Others
Employees including provisions for fringe benefits            22,353         19,945         15,130         13,269
Government institutions                                        5,357          9,614          3,000          3,206
Affiliated and subsidiary companies                               --             --          2,103          1,660
Customer advances                                              3,931          1,434          3,000            675
Accruals and others                                           12,724          9,167          5,942          5,414
Accruals for anticipated expenses in connection with
  discontinued operations                                      6,364             --             --             --
                                                              ------         ------         ------         ------
                                                              50,729         40,160         29,175         24,224
                                                              ------         ------         ------         ------
                                                              ------         ------         ------         ------
</TABLE>


                                       31
<PAGE>

                                               Tambour Limited and Subsidiaries

           Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 12--Long-Term Liabilities

A. Long-term loans*

1. Balances on Linkage and Interest Rate Basis

<TABLE>
<CAPTION>
                                                                    Annual Interest             Consolidated
                                                                      Rates as of               NIS Thousands
                                                                      December 31,    --------------------------------
                                                                         1997           December 31,     December 31,
                                                                          %                1997             1996
                                                                                           Adjusted NIS Thousands
                                                                    ---------------   ---------------  ---------------

<S>                                                                 <C>               <C>              <C>
Unlinked Israeli currency debt (I)                                                             926            1,012
Index-linked Israeli currency debt (II)                                      4.8             1,257              652
Debts in or linked to foreign currencies (III)                            7-7.25             1,737            2,233
Capital lease debt--index linked                                           7-7.2             1,171              676
                                                                         -------             -----            -----
                                                                                             5,091            4,573
Less: current maturities                                                                     1,559              647
                                                                                             -----            -----
                                                                                             3,532            3,926
                                                                                             -----            -----
                                                                                             -----            -----
(I) Includes capital notes unlinked bearing no interest,
    to minority in the amount of                                                               926              988
                                                                                             -----            -----
                                                                                             -----            -----

(II) Includes loans linked to the index from minority
     in the amount of                                                                        1,246              652
                                                                                             -----            -----
                                                                                             -----            -----

(III) Include loans from related party in the amount of                                        825            1,269
                                                                                             -----            -----
                                                                                             -----            -----
</TABLE>

2. Balances by Due Dates

<TABLE>
<CAPTION>
                                                                                                 Consolidated
                                                                                       ------------------------------
<S>                                                                                    <C>              <C>
                                                                                        December 31,     December 31,
                                                                                            1997             1996
                                                                                       -------------    -------------
                                                                                            Adjusted NIS Thousands
<S>                                                                                    <C>              <C>
First year                                                                                    1,559              647
Second year                                                                                     490              613
Third year                                                                                      389              602
Fourth year                                                                                     167              504
Fifth year--thereafter                                                                          314              568
No due date                                                                                   2,172            1,639
                                                                                              -----            -----
                                                                                              5,091            4,573
                                                                                              -----            -----
                                                                                              -----            -----
</TABLE>

*   All loans, except capital lease debt and notes and loans from related
    parties, are bank loans.


                                       32
<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 12--Long-Term Liabilities (Continued)

B. Convertible debentures of consolidated company

    (1) Consists of:

<TABLE>
<CAPTION>
                                                                                                 Consolidated
                                                                                            Adjusted NIS Thousands
                                                                                       --------------------------------
<S>                                                                                    <C>              <C>
                                                                                        December 31,     December 31,
                                                                                            1997             1996
                                                                                       ---------------  ---------------
Convertible debentures of a subsidiary*                                                       3,195            6,341
Less: Current maturities--Included in credit from others                                      3,195            3,252
                                                                                              -----            -----
                                                                                                 --            3,089
                                                                                              -----            -----
                                                                                              -----            -----

* Market value of convertible debentures at their value on the stock exchange                 3,128            6,118
                                                                                              -----            -----
                                                                                              -----            -----
</TABLE>

    (2) The convertible debentures were issued by Kedem, in the framework of a
        prospectus issued to the public, registered by name, on July 9, 1990.
        The debentures' nominal par value of NIS 6,080 thousand, principle
        and interest linked to the Consumer Price Index bearing interest at
        2% per annual, and mature in 4 equal payments on June 30 of each year
        from 1995 through and including 1998. The debentures are convertible
        each business day until June 25, 1998, into regular shares of Kedem,
        registered by name, NIS 1 par value each, according to a conversion
        of NIS 38 par value debentures for each regular share of NIS 1 par
        value, adjusted. The balance of convertible debentures par value in
        Nominal shekels of December 31, 1997 is NIS 1,430 thousand. Of the
        total convertible debentures issued, NIS 40 thousand par value are
        held by a subsidiary.

    (3) Liens to guarantee payment of the convertible debentures--see
        Note 15A(3).

C. Capital notes issued to subsidiaries
   unlinked, bearing no interest.


                                       33


<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 13--Liability Regarding Termination of Employee - Employer
         Relationship, Net

A.  Consist of:
<TABLE>
<CAPTION>
                                                                 Consolidated                  The Company
                                                         ----------------------------  ----------------------------
                                                         December 31,   December 31,   December 31,   December 31,
                                                             1997           1996           1997           1996
                                                         -------------  -------------  -------------  -------------
                                                            Adjusted NIS thousands        Adjusted NIS thousands

<S>                                                      <C>            <C>            <C>            <C>
Provisions for severance pay                                   6,455          5,656          4,320          3,969
Liability regarding the termination of employee-
  employer relationship resulting from the sale of
  major fields of operations of a subsidiary (See B(7)
  below)                                                       4,682             --             --             --
Less deposits                                                 (5,029)        (4,581)        (3,708)        (3,392)
                                                              ------         ------         ------         ------
                                                               6,108          1,075            612            577
Provision for unutilized sick leave (*)                        1,900          1,027          1,900          1,027
                                                              ------         ------         ------         ------
                                                               8,008          2,102          2,512          1,604
                                                              ------         ------         ------         ------
                                                              ------         ------         ------         ------
</TABLE>

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

(*) See C. below

B.  (1) The employees of the group, except for a few of the executive staff,
        are insured by a comprehensive pension plan. The Company deposits
        amounts in a pension fund to secure pension rights to the employees
        on retirement.

    (2) Pursuant to the agreement between the group and employees, the group
        covered its liabilities for severance pay due to each of its employees
        for the period from the start of their employment in the Company up to
        joining the pension plan by depositing the appropriate amounts due to
        each of them, in the severance pay fund accounts in the employee's name.

    (3) The group's liabilities for employee severance pay not covered by
        the said comprehensive pension plans except for those mentioned in
        (1) above, are covered by payments of premiums for management
        insurance policies.

    (4) In addition to the aforementioned in (1) above, the group deposits
        2.33% of the salaries and wages of employees in severance pay funds
        in the employees' names.

    (5) The deposits and payments mentioned above are not reflected in the
        group's financial statements, as they are neither under its control
        nor its management.

    (6) Other liabilities for severance pay are fully covered by provisions
        that are partially covered by deposits in a general fund (see A. above).


                                       34


<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 13--Liability Regarding Termination of Employee - Employer
         Relationship, Net (cont'd)

    (7) As a result of the sale of significant operations of a subsidiary,
        the subsidiary signed a special group agreement with the Ashdod Workers
        Union and the subsidiary's Workers Union under which the subsidiary's
        employees would be entitled to greater severance pay and adjustment
        grants in amounts granted according to tenure. The liability of the
        subsidiary is covered by an appropriate accrual included mainly in
        long-term liabilities as well as in "Accrual for expenses in connection
        with discontinued operations" in short-term liabilities.

C. Unutilized sick leave

   In accordance with an agreement between the employees and the Company,
   employees reaching 55 years of age are entitled to compensation, to the
   employee or his heirs, for a number of days for each 30 unutilized sick days
   determined by the percentage of utilized days during the period.

   The financial statements include a provision, based on management's
   estimate, for unutilized sick pay for employees who have reached 60 years of
   age, except for a number of employees for whom the accrual has been
   calculated from 55 years of age.

   The accrual is calculated as explained above because of the uncertainty
   that employees who have not yet reached this age will receive this
   compensation due to actual utilization of sick days or early retirement.

Note 14--Share Capital and Reserves

A.  The share capital consists of:
<TABLE>
<CAPTION>
                                                                 Authorized              Issued and paid for
                                                         --------------------------  ----------------------------
                                                         December 31,  December 31,  December 31,   December 31,
                                                             1997          1996          1997           1996
                                                         ------------  ------------  -------------  -------------
                                                                            Number of shares
                                                                               (thousands)
<S>                                                      <C>           <C>           <C>            <C>
Ordinary shares of NIS 1 each                                100,000       100,000        60,582         60,582
                                                         ------------  ------------  -------------  -------------
                                                         ------------  ------------  -------------  -------------
</TABLE>

B.  The balance of warrants issued in 1993 which were not exercised expired
    in February 1995.


                                       35


<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 15--Liens, Guarantees, Contingencies and Commitments

A.  Liens

    (1) Subsidiary companies' loans from banks and debt to automobile leasing
        companies in the amount of NIS 1,180 thousand are secured by liens on
        motor vehicles.

    (2) Commitments of a number of subsidiaries to fulfill the
        terms of projects approved by the "Investment Center" are secured
        by liens on the machinery and equipment of the approved units of
        these companies as well as by a lien on real-estate of a subsidiary
        registered for the benefit of The State of Israel.

    (3) In October 1997, an agreement was reached between a subsidiary and
        the trustee for the convertible debentures of the subsidiary,
        whereby, to insure payment of the debentures, the subsidiary would
        secure a specific lien on a deposit into which government
        debentures would be deposited whose value would be 10% more than
        the balance of the convertible debentures and at the same terms.
        The balance of this deposit on December 31, 1997 is NIS 3,610
        thousand. This lien comes instead of a floating lien of the lowest
        level on all the assets of the subsidiary that ensured payment of
        the debentures.

    (4) A subsidiary's long-term bank loan taken to finance the construction
        of a production plant is secured by a lien on all claims pertaining
        to this plant including insurance rights.

    (5) A subsidiary's bank credit balance is secured by a lien on all the
        assets of the Company and its insurance rights for the benefit of
        the bank. The balance of this bank credit as of December 31, 1997
        is NIS 2,800 thousand.

B. Guarantees

    (1) Bank credits and other liabilities of subsidiaries and affiliates in
        the maximum amount of approximately NIS 4,700 thousand are guaranteed
        by the Company. The balance of these bank credits and other liabilities
        as of December 31, 1997 amounted to approximately NIS 2,900 thousand.

    (2) The Company has provided guarantees in the ordinary course of its
        business and for the benefit of subsidiaries and affiliates in the
        approximate amount of NIS 2,000 thousand. Several subsidiaries and
        affiliates gave guarantees in the ordinary course of business in the
        approximate amount of NIS 7,300 thousand.

    (3) The Company has provided a guarantee to a bank for employees' and
        sub-contractors loans of approximately NIS 620 thousand.

    (4) In June 1997, the district court of Tel-Aviv denied a claim by an
        importer to try to import and market products under the "Fantastik"
        trademark in Israel.

As a result of this claim, Kedem obligated itself, under the terms of the
agreement regarding the sale of the "Fantastik" product group as detailed in
Note 7E, to compensate the Unilever group, the buyer, in the event of a
future court ruling that would allow the importer use of the "Fantastic"
brand-name in Israel.

The amount of the aforementioned obligation is $9.8 million during the
first year following the signing of the agreement. The amount of the
obligation will decrease by 20% each year for the five years thereafter.

As a guarantee of the terms of the obligation, the Company, Tambour Ltd,
guaranteed 61% of the amount of the obligation. In management's opinion,
based on legal counsel, the chances that this obligation will have to be
fulfilled are very small.


                                       36

<PAGE>


                                               Tambour Limited and Subsidiaries


Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 15--Liens, Guarantees, Contingencies and Commitments

B.  Guarantees (cont'd)

    (5) The Company provided a guarantee for the benefit of outside
        shareholders of a subsidiary for the fulfillment of the shareholders'
        agreement. The maximum amount of this guarantee is approximately
        $4 million.

    (6) The Company guaranteed the monthly rental payments of subsidiaries
        and affiliates in the approximate amount of NIS 280 thousand. The total
        future liability for which guarantees were given is approximately
        NIS 14,400 thousand for the length of the periods of the leases.

C. Contingencies

    (1) Various claims are pending against the group, in the total amount of
        approximately NIS 1,300 thousand, which have been partly provided for
        according to management's estimation, based on legal counsel. In
        management's opinion, no further provisions are necessary.

    (2) A lawsuit in the amount of NIS 20 million has been filed against
        Kedem, 77.66% owned subsidiary, by a customer caused bodily harm by the
        subsidiary's product. According to the subsidiary's management, based
        on legal counsel, in the event the claim is paid, it will be much
        smaller than the amount of the lawsuit and is covered by their
        insurance.

    (3) Credit Risk--Credit Risk is the maximum loss incurred when one
        party to a financial instrument fails to discharge an obligation. The
        credit risk to which the Company is exposed as of the balance sheet
        date is equal to the book value of its assets.

    (4) Director's and key employees' indemnity and insurance--the Company
        articles allow for indemnification and insurance of directors and key
        employees in accordance with the law. The liability is covered by a
        group insurance policy of an interested party.

    (5) As a result of a competitor's complaint, which in management's opinion
        is unjustified, the Restrictive Trade Practices Controller is
        investigating the matter.

D. Commitments

    (1) The Company is committed, as of the balance sheet date, to purchase
        fixed assets in the approximate amount of NIS 14,000 thousand.

    (2) Commitments for the purchase of raw materials are presented as
        "Inventory in transit"--see Note 6.

    (3) The Company and several of its subsidiaries and affiliates are
        required, under various know-how agreements, to pay royalties to those
        supplying the know-how.

Such royalties amounted to NIS 841 thousand for the group in 1997
(1996--NIS 2,032 thousand, 1995--NIS 1,005 thousand).

The group is not dependent upon any specific supplier of know-how and no
material damage will be caused in the event of the termination of any
know-how agreement.

                                       37


<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 15--Liens, Guarantees, Contingencies and Commitments (cont')

D.  Commitments (cont'd)

    (4) The Company and several subsidiaries and affiliates entered into
        leases for buildings used by them. Most of these leases include an
        initial lease period with renewal options for additional periods not
        exceeding 10 years in total. The rental payments are linked, mainly, to
        the index, and in part, to the dollar. The total liability of the group
        for rental payments in future years (based on rental payments in force
        on December 31, 1997), is approximately NIS 21,000 thousands.

Note 16--Earnings Per Share

<TABLE>
<CAPTION>
                                        1997                              1996                              1995
                          --------------------------------  --------------------------------  --------------------------------
                                           Weighted                          Weighted                          Weighted
                                           average                           average                           average
                                           number of                         number of                         number of
                                           shares in                         shares in                         shares in
                           Primary         primary          Primary          primary          Primary          primary
                           earnings        earnings         earnings         earnings         earnings         earnings
                           --------------  --------------   ---------------  --------------   ---------------  ---------------
                           NIS thousands   *NIS thousands   NIS thousands    *NIS thousands   NIS thousands    *NIS thousands
                           --------------  ---------------  ---------------  ---------------  ---------------  ---------------
                           Adjusted                         Adjusted                           Adjusted
                           --------------                   ---------------                   --------------
<S>                       <C>              <C>              <C>              <C>              <C>              <C>
Primary earnings from
  continuing
  operations                    26,657           60,369           35,877           60,529           37,405           60,582
                                ------           ------           ------           ------           ------           ------
                                ------           ------           ------           ------           ------           ------
Primary earnings                31,613           60,369           35,877           60,529           37,405           60,582
                                ------           ------           ------           ------           ------           ------
                                ------           ------           ------           ------           ------           ------
</TABLE>



*   Number of shares in nominal NIS thousands.

    In order to check the probability of the exercise of the convertible
    securities and for the calculations of earnings per share, the present
    value is calculated assuming the exercise of the convertible securities
    on the last possible date, at Shekel interest rates for securities linked
    to the Index, after taxes, of 4% (1996--4.5%; 1995--4.5%).


                                       38

<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 17--Taxes on Income

A. "Industrial company"--the Company and its main subsidiaries are industrial
    companies under the Encouragement of Industry (Taxes) Law, 1969, and
    are entitled to the benefit of accelerated depreciation rates.

B. The provisions for taxes were computed according to the Income Tax Ordinance
   (New Version), 1961, and the Income Tax Law (Inflationary Adjustments), 1985.

C. The composition of deferred taxes:

<TABLE>
<CAPTION>
                                                                Consolidated                   The Company
                                                         ---------------------------  ------------------------------
                                                         December 31,  December 31,   December 31,    December 31,
                                                             1997          1996           1997            1996
                                                         ------------  -------------  -------------  ---------------
                                                           Adjusted NIS thousands         Adjusted NIS thousands
<S>                                                      <C>           <C>            <C>            <C>
For property, plant and equipment                            (10,111)       (8,423)        (2,934)           (416)
For public offering issue expenses, and others                 8,878         8,182          5,666           5,343
For tax losses and deductions carried forward                    725         3,336             --              --
For inventories                                                 (171)         (691)           (75)           (430)
                                                         ------------       ------         ------           -----
                                                                (679)        2,404          2,657           4,497
                                                         ------------       ------         ------           -----
                                                         ------------       ------         ------           -----
Included:
In current assets                                              6,566         7,019          4,599           4,606
In investments and long term assets                              266           189             --              --
In long-term liabilities                                      (7,511)       (4,804)        (1,942)           (109)
                                                         ------------       ------         ------           -----
                                                                (679)        2,404          2,657           4,497
                                                         ------------       ------         ------           -----
                                                         ------------       ------         ------           -----
</TABLE>

D. Changes in deferred taxes:
<TABLE>
<CAPTION>
                                                               Consolidated                     The Company
                                                      -------------------------------  ------------------------------
                                                      December 31,     December 31,    December 31,    December 31,
                                                          1997             1996            1997            1996
                                                      -------------    ------------    -------------  ---------------
                                                          Adjusted NIS Thousands           Adjusted NIS Thousands
<S>                                                   <C>              <C>             <C>            <C>
Balance at beginning of year                                2,404             8,815        4,497           9,238
Investment in subsidiary company                              (65)               --           --              --
Affiliate company that became a subsidiary                     --               372           --              --
Newly-consolidated subsidiary                                  --             4,537           --           5,042
Change in deferred taxes presented in Statement of
  income                                                   (3,018)          (11,320)      (1,840)         (9,783)
                                                           ------         ----------       ------           -----
Balance at end of year                                       (679)            2,404        2,657           4,497
                                                           ------         ----------       ------           -----
                                                           ------         -----------      ------           -----
</TABLE>


                                       39


<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 17--Taxes on Income (cont'd)

E.  Income taxes in statements of income

    Income taxes in the adjusted statements of income consist of:

<TABLE>
<CAPTION>
                                                                                            Consolidated
                                                                                  -----------------------------------
                                                                                   For the year ended December 31,
                                                                                  -----------------------------------
                                                                                     1997         1996         1995
                                                                                  ---------  -------------  ---------
                                                                                        Adjusted NIS thousands
<S>                                                                               <C>        <C>            <C>
Provision for current year                                                           11,234       14,045       25,668
Change in deferred taxes, net *                                                       3,018       11,320          763
Taxes relating to previous years                                                        (73)         371        1,420
                                                                                  ---------       ------    ---------
                                                                                     14,179       25,736       27,851
Presented in net income from discontinued operations, net                               157       (1,951)          --
                                                                                  ---------       ------    ---------
                                                                                     14,336       23,785       27,851
                                                                                  ---------       ------    ---------
                                                                                  ---------       ------    ---------
</TABLE>

<TABLE>
<CAPTION>
                                                                                            The Company
                                                                                    For the year ended December 31,
                                                                                  -----------------------------------
                                                                                     1997         1996         1995
                                                                                  ---------  -------------  ---------
                                                                                        Adjusted NIS thousands
<S>                                                                               <C>        <C>            <C>
Provision for current year                                                           11,403       10,178       24,276
Change in deferred taxes, net *                                                       1,840        9,783          221
Taxes relating to previous years                                                         --           --        1,438
                                                                                  ---------       ------    ---------
                                                                                     13,243       19,961       25,935
                                                                                  ---------       ------    ---------
                                                                                  ---------       ------    ---------
* Includes change resulting from decrease in tax rate in the amount of
Consolidated                                                                             --           --          126
                                                                                  ---------       ------    ---------
                                                                                  ---------       ------    ---------
The Company                                                                              --           --          122
                                                                                  ---------       ------    ---------
                                                                                  ---------       ------    ---------
</TABLE>

F.  Tax assessments

Final tax assessments have been received by the Company for tax years up
to and including 1994. Consolidated subsidiaries have received final tax
assessments for various years up to and including 1995.


                                       40


<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 17--Taxes on Income (cont'd)

G.  Effective tax reconciliation
<TABLE>
<CAPTION>
                                                                                       For the year ended December 31,
                                                                                       -------------------------------
                                                                                         1997       1996       1995
                                                                                       ---------  ---------  ---------
                                                                                           Adjusted NIS thousands
<S>                                                                                    <C>        <C>        <C>
Tax rates in effect                                                                           36%        36%        37%
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
Consolidated
Theoretical tax at rates in effect                                                        15,098     21,754     24,695
Erosion of tax advances                                                                      248        364        824
Tax effect of permanent differences, net                                                   1,479      1,480      2,228
Losses and tax benefits not utilized                                                         941        490        510
Utilization of losses and benefit from previous year                                      (2,274)    (1,811)      (704)
Differences between the definition of equity and assets for tax purposes and book
  purposes and others, net                                                                (1,120)     1,137     (1,122)
Taxes for previous years                                                                     (73)       371      1,420
Offset of losses at regular tax rate by income taxed at lower rate                           675         --         --
Deletion of deferred taxes balances                                                         (638)        --         --
                                                                                       ---------  ---------  ---------
                                                                                          14,336     23,785     27,851
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
The Company
Theoretical tax at rates in effect                                                        15,102     19,153     23,604
Erosion of tax advances                                                                      195        182        783
Tax effect of permanent differences, net                                                      47        656      1,288
Utilization of losses and benefit from previous year                                        (948)      (491)      (704)
Differences between the definition of equity and assets for tax purposes and others,
  net                                                                                     (1,153)       461       (474)
                                                                                       ---------  ---------  ---------
Taxes for previous years                                                                      --         --      1,438
                                                                                          13,243     19,961     25,935
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>

H. Tax--losses carried forward to future years.

    (1) The Company has accumulated real losses on securities for tax
        purposes in the approximate amount of NIS 26,515 thousand. This loss,
        linked  to the index, will only be tax-deductible in future years
        against income from securities, if they so exist. No deferred taxes
        receivable have been recorded for these losses - see Note 2K.

    (2) Several subsidiaries have accumulated losses for tax purposes in the
        approximate amount of NIS 11,000 thousand (See Note 2K) for which no
        deferred taxes receivable have been recorded.


                                       41


<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------



Note 18--Linked Balances

Consolidated
<TABLE>
<CAPTION>
                                                                December 31, 1997                  December 31, 1996
                                                        ---------------------------------  ---------------------------------
                                                           In or                              In or
                                                          linked                             linked
                                                        to foreign     Index               to foreign     Index
                                                         currency     linked    Unlinked    currency     linked    Unlinked
                                                        -----------  ---------  ---------  -----------  ---------  ---------
                                                                               Adjusted NIS thousand
<S>                                                     <C>          <C>        <C>        <C>          <C>        <C>
Current assets
Cash and cash equivalents                                    3,840         134     27,435      14,724          --     46,553
Marketable securities                                        1,722      31,335     19,725       1,791      25,873     28,142
Other receivables (*)                                          258       5,636     11,772         483       3,325     12,596
Accounts receivable--trade                                  12,156          --    174,959      14,835          --    151,445
Bank deposits                                                   --      17,191         --          --       3,561         --
                                                        -----------  ---------  ---------  -----------  ---------  ---------
                                                            17,976      54,296    233,891      31,833      32,759    238,736
Investments and long-term assets
Affiliated companies and others--capital notes and
  loans including current maturities                            --      18,050         --          --      18,133        160
Bank deposits and other receivables                            568       2,977         --          --      19,927         --
                                                        -----------  ---------  ---------  -----------  ---------  ---------
Total assets                                                18,544      75,323    233,891      31,833      70,819    238,896
                                                        -----------  ---------  ---------  -----------  ---------  ---------
                                                        -----------  ---------  ---------  -----------  ---------  ---------
Current liabilities
Short-term bank credits                                      2,040      20,150      4,205       1,680          --     19,632
Accounts payable--trade                                     12,199          --     27,245      11,278       1,275     26,058
Other accounts payable                                         606          61     50,062         628          39     39,493
Dividend declared                                               --          --     44,842          --          --     53,494
                                                        -----------  ---------  ---------  -----------  ---------  ---------
                                                            14,845      20,211    126,354      13,586       1,314    138,677
Long-term liabilities
Liability regarding termination of employee-employer
  relationship, net                                             --       2,512      5,496          --       1,604        498
Long-term loans                                              1,737       1,795         --       2,238       1,296      1,039
Convertible debentures                                          --          --         --          --       6,341         --
                                                        -----------  ---------  ---------  -----------  ---------  ---------
Total liabilities                                           16,582      24,518    131,850      15,824      10,555    140,214
                                                        -----------  ---------  ---------  -----------  ---------  ---------
                                                        -----------  ---------  ---------  -----------  ---------  ---------
</TABLE>



(*) Exclusive of deferred taxes and prepaid expenses.


                                       42


<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 18--Linked Balances (cont'd)

Company

<TABLE>
<CAPTION>
                                                               December 31, 1997                  December 31, 1996
                                                       ---------------------------------  ---------------------------------
                                                          In or                              In or
                                                         linked                             linked
                                                       to foreign     Index               to foreign     Index
                                                        currency     linked    Unlinked    currency     linked    Unlinked
                                                       -----------  ---------  ---------  -----------  ---------  ---------
                                                                                Adjusted NIS thousands
<S>                                                    <C>          <C>        <C>        <C>          <C>        <C>
Current assets
Cash and cash equivalent                                     2,600          --      3,452      13,939          --     38,138
Marketable securities                                        1,722      31,335     16,115       1,791      25,873     28,142
Other receivables (*)                                          465      27,265      8,972         659      19,866      9,873
Accounts receivable - trade                                  9,637          --     89,938      12,087          --     71,847
Bank deposits                                                   --      17,191         --          --       3,561         --
                                                       -----------  ---------  ---------  -----------  ---------  ---------
                                                           14,424      75,791    118,477      28,476      49,300    148,000
Investments
Subsidiaries--loans and capital notes, including
  current maturities                                           --       9,086     23,627          --       4,542     25,278
Affiliated companies and others--capital notes and
  loans including current maturities                           --      18,050         --          --      18,010         --
Bank deposits and other receivables                            --       2,600         --          --      19,422         --
                                                       -----------  ---------  ---------  -----------  ---------  ---------
Total assets                                               14,424     105,527    142,104      28,476      91,274    173,278
                                                       -----------  ---------  ---------  -----------  ---------  ---------
                                                       -----------  ---------  ---------  -----------  ---------  ---------
Current liabilities
Short-term bank credits                                        --      15,869        286          --          --        103
Accounts payable--trade                                     4,409          --     12,710       4,205          --      7,293
Other accounts payable                                         --          --     29,175          --          --     24,224
Dividend declared                                              --          --     45,000          --          --     53,494
                                                       -----------  ---------  ---------  -----------  ---------  ---------
                                                            4,409      15,869     87,171       4,205          --     85,114
Long-term liabilities
Liability regarding termination of employee-employer
  relationship, net                                            --       2,512         --          --       1,604         --
Capital notes issued to subsidiaries                           --          --      2,065          --          --      2,209
                                                       -----------  ---------  ---------  -----------  ---------  ---------
Total liabilities                                           4,409      18,381     89,236       4,205       1,604     87,323
                                                       -----------  ---------  ---------  -----------  ---------  ---------
                                                       -----------  ---------  ---------  -----------  ---------  ---------
</TABLE>



(*) Exclusive of deferred taxes and prepaid expenses.


                                       43


<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 19--Supplementary Information to the Statements of Income

A. Sales (net of discounts)

Consist of:

<TABLE>
<CAPTION>
                                                For the year ended December 31,
                                               --------------------------------
                                                 1997       *1996       1995
                                               --------    --------    --------
                                                     Adjusted NIS thousands
<S>                                            <C>          <C>         <C>
Consolidated
Local                                          561,016      562,875     554,239
Export                                          70,118       72,091      40,581
                                               --------    --------    --------
                                               631,134      634,966     594,820
                                               --------    --------    --------
                                               --------    --------    --------
Company
Local                                          378,157      384,473     432,510
Export                                          62,241       61,806      34,397
                                               --------    --------    --------
                                               440,398      446,279     466,907
                                               --------    --------    --------
                                               --------    --------    --------
B.  Cost of sales

Consolidated
Materials                                      293,190      289,722     289,096
Labor                                           66,469       59,669      53,442
Other manufacturing expenses                    36,458       37,711      35,536
Depreciation and amortization                   19,649       23,012      21,702
                                               --------    --------    --------
                                               415,766      410,114     399,776
                                               --------    --------    --------
Decrease (Increase) in inventories of:
Work in process                                 (3,856)       2,850        859
Finished products                                  853        5,226     (3,351)
                                               --------    --------    --------
                                                (3,003)       8,076     (2,492)
                                               --------    --------    --------
                                               412,763      418,190    397,284
                                               --------    --------    --------
                                               --------    --------    --------
</TABLE>

                                       44


<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 19--Supplementary Information to the Statements of Income (cont'd)

B.  Cost of sales (cont'd)

<TABLE>
<CAPTION>
                                                For the year ended December 31,
                                               --------------------------------
                                                 1997       *1996       1995
                                               --------    --------    --------
                                                     Adjusted NIS thousands
<S>                                            <C>          <C>         <C>
Company
Materials                                      202,920      193,509     213,239
Labor                                           45,836       44,473      44,321
Other manufacturing expenses                    26,375       26,269      28,587
Depreciation and amortization                   14,927       17,717      17,783
                                               ----------  --------    ---------
                                               290,058      281,968     303,930
                                               ----------  --------    ---------
Decrease (Increase) in inventories of:
Work in process                                 (3,813)       2,769      (1,077)
Finished products                               (4,412)       4,346      (2,566)
                                               ----------  --------    ---------
                                                (8,225)       7,115      (3,643)
                                               ----------  --------    ---------
                                               281,833     289,083     300,287
                                               ----------  --------    ---------
                                               ----------  --------    ---------

C. Selling and marketing expenses

   Consist of:

Consolidated
Labor                                           50,903      45,024       37,057
Depreciation and amortization                    7,189       8,424        6,171
Advertising                                     21,470      17,194       16,387
Agents' commissions                              5,842       6,784        1,527
Others                                          37,406      31,158       30,624
Doubtful accounts and bad debt expense           4,226       1,940        3,345
                                               ----------  --------    ---------
                                               127,036     110,524       95,111
                                               ----------  --------    ---------
                                               ----------  --------    ---------
Company
Labor                                           35,834       33,129       30,331
Depreciation and amortization                    3,357        3,862        3,892
Advertising                                     18,580       14,227       15,086
Others                                          29,242       24,815       26,045
Doubtful accounts and bad debt expense           3,151        2,006        2,615
                                               ----------  --------    ---------
                                                90,164       78,039       77,969
                                               ----------  --------    ---------
                                               ----------  --------    ---------
</TABLE>

* Consolidated--Reclassified--See Note 2U.

                                       45


<PAGE>
                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 19--Supplementary Information to the Statements of Income (cont'd)

D. General and administrative expenses

   Consist of:
<TABLE>
<CAPTION>
                                                For the year ended December 31,
                                                -------------------------------
                                                  1997      * 1996      1995
                                                ---------  ---------  ---------
                                                     Adjusted NIS Thousands
<S>                                             <C>        <C>        <C>
Consolidated
Labor                                            28,099     24,509     21,423
Depreciation and amortization                     1,669      2,531      1,666
Others                                           17,423     14,229     13,786
                                                ---------  ---------  ---------
                                                 47,191     41,269     36,875
                                                ---------  ---------  ---------
                                                ---------  ---------  ---------
Company
Labor                                            20,090     16,386     16,800
Depreciation and amortization                       957      1,170      1,137
Others                                           10,653      9,741      9,289
                                               ---------  ---------  ---------
                                                 31,700     27,297     27,226
                                               ---------  ---------  ---------
                                               ---------  ---------  ---------
E. Finance income (expense),net

   Consist of:
<CAPTION>
                                                For the year ended December 31,
                                                -------------------------------
                                                  1997      * 1996      1995
                                                ---------  ---------  ---------
                                                     Adjusted NIS thousands
<S>                                             <C>        <C>        <C>
Consolidated
Bank credit                                       (1,341)        91       (528)
Long-term loans finance (expense) income            (320)       (22)      (177)
Interest on bank deposits                          1,348      1,960      3,637
Gain from marketable securities                    3,618      1,929      1,529
Commissions and bank expenses                       (763)      (729)    (1,438)
Erosion of monetary items and others, net         (5,243)    (9,676)    (5,862)
                                               ---------  ---------  ---------
                                                  (2,701)    (6,447)    (2,839)
                                                   1,299        702     --
                                               ---------  ---------  ---------
                                                  (1,402)    (5,745)    (2,839)
                                               ---------  ---------  ---------
                                               ---------  ---------  ---------
Company
Bank credit                                         (175)       139         90
Interest on bank deposits                          1,065      1,919      3,661
Gain from marketable securities                    3,466      1,811      1,529
Commission and bank expenses                        (150)      (120)      (703)
Erosion of monetary items and others, net           (974)    (5,408)    (4,364)
                                               ---------  ---------  ---------
                                                   3,232     (1,659)       213
                                               ---------  ---------  ---------
                                               ---------  ---------  ---------
</TABLE>


*   Consolidated--Reclassified--See Note 2U.

                                       46
<PAGE>
                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 19--Supplementary Information to the Statements of Income (cont'd)

F. Other income (expenses), net

   Consist of:
<TABLE>
<CAPTION>
                                               For the year ended December 31,
                                               -------------------------------
                                                 1997      * 1996      1995
                                               ---------  ---------  ---------
                                                   Adjusted NIS thousands
                                               -------------------------------
<S>                                            <C>        <C>        <C>
Consolidated
Capital gains, net                                 1,223        973      1,820
Loss from sale of goodwill and fixed
 assets to affiliated company                     **(976)        --         --
Profit (Loss) on realization of
 investment in affiliated company                     (2)      (220)       159
Commission income                                    175        104        604
Sundry income                                          6      1,137        178
Amortization of (goodwill) deferred
 credit                                           (1,230)    (1,464)       350
Related parties:
Management fees and participation
 in expenses                                          --         91        236
Rental income                                         --        568        684
                                               ---------  ---------  ---------
                                                    (804)     1,189      4,031
                                               ---------  ---------  ---------
                                               ---------  ---------  ---------
Company
Capital gains, net                                   402        778        879
Profit (Loss) on realization of
 investment in affiliated company                     --       (220)       159
Sundry income                                        389      1,137        199
Related parties:
Management fees and participation
 in expenses                                         154        169        236
Rental income                                      1,071      1,137        684
                                               ---------  ---------  ---------
                                                   2,016      3,001      2,157
                                               ---------  ---------  ---------
                                               ---------  ---------  ---------
</TABLE>

*  Consolidated--Reclassified--See Note 2U. ** Net of expenses related to the
   sale and net of amortization of goodwill created upon acquiring Kedem.
   For details regarding this sale--see note 7E(2).

G. Income from discontinued operations, net--See note 7E(1) and 2U

   Consist of:
<TABLE>
<CAPTION>
                                                                                       For the year ended
                                                                                          December 31,
                                                                                      ----------------------
                                                                                          1997         1996
                                                                                      ---------    ---------
                                                                                      Adjusted NIS thousands
                                                                                      ----------------------
<S>                                                                                   <C>          <C>
Capital gain on the sale of goodwill and fixed assets (I)                                 5,249           --
Results of discontinued operations through the date of sale(II)                            (293)       1,438
                                                                                      ---------    ---------
                                                                                          4,956        1,438
                                                                                      ---------    ---------
                                                                                      ---------    ---------
</TABLE>
                                       47
<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 19- -Supplementary Information to the Statements of Income (con't)

    G. Income from discontinued operations, net (cont'd)

    (I) The capital gain on the sale of goodwill and fixed assets is
        presented net of the tax effect of NIS 2,953 thousand, net of
        goodwill created on acquisition that relates to the discontinued
        operation and net of the minority interest.

    (II) Following are details of the Statement of Income items of the
        discontinued operation for the years ended December 31, 1996 and
        1997. The Statement of Income items of the discontinued operation for
        1996 have been reclassified in the Consolidated Statement of Income
        and have been presented as income from discontinued operations.

<TABLE>
<CAPTION>
                                              Fantastik discontinued operations
                                                For the year ended December 31,
                                              ---------------------------------
                                                    * 1997             1996
                                              -----------------    ------------
                                                   Adjusted NIS Thousands
<S>                                           <C>                 <C>
Revenue from sales                                    29,112           35,950
Cost of sales                                         18,184           19,728
                                                   ---------        ---------
Gross profit                                          10,928           16,222
                                                   ---------        ---------
Selling and marketing expenses                         7,846            8,250
General and administrative expenses                    2,592            2,902
                                                   ---------        ---------
                                                      10,438           11,152
                                                   ---------        ---------
Operating income                                         490            5,070
Finance expenses, net                                  1,073              702
                                                   ---------        ---------
Income before income taxes                              (583)           4,368
Income taxes                                            (157)           1,951
                                                   ---------        ---------
Net income after income taxes                           (426)           2,417
Equity in income (losses) of
 affiliated companies, net                               133             (979)
                                                   ---------        ---------
Income (loss) for the period / year                     (293)           1,438
                                                   ---------        ---------
                                                   ---------        ---------
</TABLE>


*   From January 1, 1997 until the operation was discontinued--November 1997.

                                       48




<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 20--Related Parties

    A. The group carries out transactions, in the ordinary course of
       business, with entities that are interested parties.

       The Securities Authority  has exempted the Company from describing
       transactions with Clal Israel Ltd., Koor Industries Ltd., I.D.B.
       Holdings Ltd., and Leumi Israel Bank Ltd. and the companies held
       by them.

       Details regarding balances and transactions with related parties and
       other interested parties, mainly companies in the Tambour group, are
       given in this note as well as in other notes (see also paragraph G.)

    B. Balance sheet:
<TABLE>
<CAPTION>
                                                                 Consolidated                   The Company
                                                         ----------------------------  ------------------------------
                                                         December 31,   December 31,    December 31,    December 31,
                                                             1997           1996            1997            1996
                                                         -------------  -------------  ---------------  -------------
                                                            Adjusted NIS Thousands         Adjusted NIS Thousands
<S>                                                      <C>            <C>            <C>              <C>
(1) Included in assets

Cash and cash equivalents                                     19,124         31,059           1,531          24,350
                                                              ------         ------           -----          ------
                                                              ------         ------           -----          ------
Marketable securities                                          6,101          6,972           6,101           6,972
                                                              ------         ------           -----          ------
                                                              ------         ------           -----          ------
Short-term bank deposits                                       8,342           --             8,342             --
                                                              ------         ------           -----          ------
                                                              ------         ------           -----          ------
Long-term bank deposits                                         --            7,836              --           7,836
                                                              ------         ------           -----          ------
                                                              ------         ------           -----          ------
(2) Included in liabilities

Bank credits                                                   4,758          6,543              --              --
                                                              ------         ------           -----          ------
                                                              ------         ------           -----          ------
Liability regarding termination of employee-employer
  relationship                                                 1,882          1,652           1,882           1,652
                                                              ------         ------           -----          ------
                                                              ------         ------           -----          ------
</TABLE>

    C. The highest balance of interested parties in current assets
<TABLE>
<CAPTION>
                                                                 Consolidated                  The Company
                                                         ----------------------------  ----------------------------
                                                         December 31,   December 31,   December 31,   December 31,
                                                             1997           1996           1997           1996
                                                         -------------  -------------  -------------  -------------
                                                            Adjusted NIS Thousands        Adjusted NIS Thousands
<S>                                                      <C>            <C>            <C>            <C>
In cash and cash equivalents                                  32,734         31,059         32,734         24,350
                                                              ------         ------         ------         ------
                                                              ------         ------         ------         ------
In accounts receivable--trade and others                       5,897          3,599         36,402         28,143
                                                              ------         ------         ------         ------
                                                              ------         ------         ------         ------
In bank deposits                                              15,000         46,099         15,000         46,099
                                                              ------         ------         ------         ------
                                                              ------         ------         ------         ------
</TABLE>

                                    49
<PAGE>
                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 20--Related Parties

    D. Transactions (in the normal course of business):

<TABLE>
<CAPTION>
                                                                                          Year Ended December 31,
                                                                                      -------------------------------
                                                                                        1997       1996       1995
                                                                                      ---------  ---------  ---------
                                                                                          Adjusted NIS Thousands
<S>                                                                                   <C>        <C>        <C>
Consolidated

Sales                                                                                   13,677   * 13,947      5,993
                                                                                      ---------  ---------  ---------
                                                                                      ---------  ---------  ---------
Purchases and other expenses                                                                --        991        901
                                                                                      ---------  ---------  ---------
                                                                                      ---------  ---------  ---------
Finance income                                                                             295        235         --
                                                                                      ---------  ---------  ---------
                                                                                      ---------  ---------  ---------
Company

Sales                                                                                    34,416    *29,047     10,288
                                                                                      ---------  ---------  ---------
                                                                                      ---------  ---------  ---------
Purchases and other expenses                                                              2,635      2,240      2,987
                                                                                      ---------  ---------  ---------
                                                                                      ---------  ---------  ---------
Management fees paid                                                                        963      1,101        914
                                                                                      ---------  ---------  ---------
                                                                                      ---------  ---------  ---------
Finance income                                                                              536        518        391
                                                                                      ---------  ---------  ---------
                                                                                      ---------  ---------  ---------
</TABLE>

*   Reclassified--See Note 2U.

    E. Remuneration of interested parties

<TABLE>
<CAPTION>
                                                                                                   Year Ended December 31,
                                                                                   Number      -------------------------------
                                                                                  of People      1997       1996       1995
                                                                                -------------  ---------  ---------  ---------
                                                                                                   Adjusted NIS Thousands
<S>                                                                             <C>            <C>        <C>        <C>
Interested parties employed by the company or on its behalf                               1        1,890      1,773      1,862
                                                                                               ---------  ---------  ---------
                                                                                               ---------  ---------  ---------
Directors not employed by the company or on its behalf                                   10          309        385        380
                                                                                               ---------  ---------  ---------
                                                                                               ---------  ---------  ---------
</TABLE>

    F. On October 6, 1997, Kedem signed two agreements with a consolidated
       company, Tambour Ecology Ltd., relating to two deals--for the sale of
       the metal treatment operation and the water treatment operation which
       includes the sale of goodwill, brand-names, distribution rights, raw
       material inventory and finished goods as well as a non-competition
       agreement whereby Kedem will not operate in these operations for
       five years.

       The proceeds from these agreements was approximately NIS 1.3 million
       (excluding proceeds from the sale of the inventory). The effect of these
       agreements on the results of operations of the group is immaterial.

    G. Also see Notes 4, 7, 11, 12, 15 and 19F.

                                     50
<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 21--Condensed Nominal Financial Statements of The Company


    A. Balance Sheet

<TABLE>
<CAPTION>
                                                                                       December 31,  December 31,
                                                                                           1997          1996
                                                                                       ------------  ------------
                                                                                             NIS Thousands
<S>                                                                                    <C>           <C>
Current assets
Cash and cash equivalents                                                                    6,052        48,675
Marketable securities                                                                       49,172        52,161
Accounts receivable--trade                                                                  99,575        78,452
Other receivables                                                                           42,229        33,963
Bank deposits                                                                               17,191         3,328
Inventories                                                                                 80,613        67,954
                                                                                       ------------  ------------
                                                                                           294,832       284,533
                                                                                       ------------  ------------
Investments and long-term assets
Subsidiaries and affiliates                                                                107,231        89,926
Bank deposits and other receivables                                                          2,600        18,153
                                                                                       ------------  ------------
                                                                                           109,831       108,079
                                                                                       ------------  ------------
Property, plant and equipment
Cost                                                                                       209,339       192,179
Less: Accumulated depreciation                                                             102,823        93,181
                                                                                       ------------  ------------
                                                                                           106,516        98,998
                                                                                       ------------  ------------
Intangible assets and deferred charges                                                         123           163
                                                                                       ------------  ------------
                                                                                           511,302       491,773
                                                                                       ------------  ------------
                                                                                       ------------  ------------
</TABLE>
                                       51

<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 21--Condensed Nominal Financial Statements of The Company (Cont'd.)

    A. Balance Sheet (cont'd)

<TABLE>
<CAPTION>
                                                                                       December 31,  December 31,
                                                                                           1997          1996
                                                                                       ------------  ------------
                                                                                             NIS Thousands
<S>                                                                                    <C>           <C>
Current liabilities
Bank credits                                                                                16,155            96
Accounts payable--trade                                                                     17,119        10,747
Other accounts payable                                                                      29,175        22,642
Dividend declared                                                                           45,000        50,000
                                                                                       ------------  ------------
                                                                                           107,449        83,485
                                                                                       ------------  ------------
Long-term liabilities
Liability regarding termination of employee-employer relationship, net                       2,512         1,499
Capital notes issued to subsidiaries                                                         2,065         2,065
Deferred taxes, net                                                                          3,704         2,802
                                                                                       ------------  ------------
                                                                                             8,281         6,366
                                                                                       ------------  ------------
Shareholders' equity
Share capital                                                                               60,582        60,582
Paid-in capital                                                                            149,934       149,934
Retained earnings                                                                          186,076       192,426
                                                                                       ------------  ------------
                                                                                           396,592       402,942
Less: company shares held by subsidiary                                                     1,020          1,020
                                                                                       ------------  ------------
                                                                                           395,572       401,922
                                                                                       ------------  ------------
                                                                                           511,302       491,773
                                                                                       ------------  ------------
                                                                                       ------------  ------------
</TABLE>

                                      52

<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 21--Condensed Nominal Financial Statements of The Company (Cont'd.)

    B. Statements of Income
<TABLE>
<CAPTION>
                                                                                       Year Ended December 31,
                                                                                   -------------------------------
                                                                                     1997       1996       1995
                                                                                   ---------  ---------  ---------
                                                                                            NIS Thousands
<S>                                                                                <C>        <C>        <C>
Revenue from sales                                                                   431,578    401,231    376,446
Cost of sales                                                                        266,234    247,523    232,959
                                                                                   ---------  ---------  ---------
Gross profit                                                                         165,344    153,708    143,487
                                                                                   ---------  ---------  ---------
Selling and marketing expenses                                                        88,067     69,737     62,613
General and administrative expenses                                                   30,887     24,284     21,784
                                                                                   ---------  ---------  ---------
                                                                                     118,954     94,021     84,397
                                                                                   ---------  ---------  ---------
Operating income                                                                      46,390     59,687     59,090
Finance income, net                                                                   16,443     19,500     17,881
Other income, net                                                                      2,045      2,956      1,840
                                                                                   ---------  ---------  ---------
Income before income taxes                                                            64,878     82,143     78,811
Income taxes                                                                          12,035     17,111     20,021
                                                                                   ---------  ---------  ---------
Net income after income taxes                                                         52,843     65,032     58,790
Equity in earnings of subsidiaries and affiliates, net                                 5,579      6,473      1,004
                                                                                   ---------  ---------  ---------
Net income for the year                                                               58,422     71,505     59,794
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
</TABLE>
                                       53
<PAGE>
                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------


Note 21--Condensed Nominal Financial Statements of The Company (Cont'd.)

    C. Statement of shareholders' equity

<TABLE>
<CAPTION>
                                                                                                 Company
                                                                Proceeds                         Shares
                                                 Paid-in       From Issue       Retained         Held by
                               Share Capital     Capital      of Warrants       Earnings       Subsidiary         Total
                               -------------  -------------  --------------  --------------  ---------------  --------------
                               NIS Thousands  NIS Thousands  NIS Thousands   NIS Thousands    NIS Thousands   NIS Thousands
                               -------------  -------------  --------------  --------------  ---------------  --------------
<S>                            <C>            <C>            <C>             <C>             <C>              <C>
Balance as of
  January 1, 1995                   60,582        134,097          15,837         171,127          --              381,643

Changes in 1995:
Expiration of warrants              --            *15,837        *(15,837)         --              --               --
Net income                          --             --              --              59,794          --               59,794
Dividend                            --             --              --             (20,000)         --              (20,000)
                                    ------    -------------       -------         -------          ------          -------
Balance as of
 December 31, 1995                  60,582        149,934          --             210,921          --              421,437

Changes in 1996:
Net income                          --             --              --              71,505          --               71,505
Dividend **                         --             --              --             (90,000)         --              (90,000)
Company shares held by
  subsidiary                        --             --              --              --              (1,020)          (1,020)
                                    ------    -------------       -------         -------          ------          -------
Balance as of
 December 31,1996                   60,582        149,934          --             192,426          (1,020)         401,922

Changes in 1997:
Net income                          --             --              --              58,422          --               58,422
Dividend***                         --             --              --             (64,772)         --              (64,772)
                                    ------    -------------       -------         -------          ------          -------
Balance as of
  December 31,1997                  60,582        149,934          --             186,076          (1,020)         395,572
                                    ------    -------------       -------         -------          ------          -------
                                    ------    -------------       -------         -------          ------          -------
</TABLE>


*   Net of issue and registration expenses, after tax affect.

**  Includes NIS 50,000 thousands dividend declared (see also Note 22).

*** Includes NIS 44,842 thousands dividend declared subsequent to Balance Sheet
    date (see also Note 22).

                                     54


<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 22--Subsequent Events

On March 6, 1998 the Company's Board of Directors declared an additional
interim cash dividend distribution of NIS 45,000 thousand which is approximately
NIS 0.74 per NIS 1 par value of shares outstanding on the date declared. The
dividend will be paid on April 28, 1998 and is included in these financial
statements as a dividend declared.

This dividend is included in these financial statements as a dividend
declared. In addition, the Board of Directors decided to recommend to the
shareholders at the General Meeting the interim dividend in the amount of NIS
65,000 thousand as the final dividend of 1997.

Note 23--Consolidated Financial Data Presented According to U.S. GAAP

A. Change in Method of Reporting

In December 1981, the Financial Accounting Standards Board in the U.S.A.
established a new standard for reporting the financial position and results of
operations of foreign subsidiaries in United States (U.S.) consolidated
financial statements (SFAS No. 52). The Israeli subsidiaries and investees of
PEC Israel Economic Corporation (PEC) had been preparing U.S. dollar financial
statements under SFAS No. 52 utilizing the hyper-inflationary economy approach
which essentially retains historical dollar values for non-monetary assets
including long-term investments, property and equipment and equity accounts.

The inflation rate in Israel has steadily declined to the point that the use
of historical dollar accounting as prescribed in SFAS No. 52 may no longer be
appropriate for the translation of accounting (SFAS No. 52), the functional
currency of the Israeli entities was defined as the reporting currency of the
U.S. investor. For the purpose of PEC's investee companies the transition date
for the reporting currency basis was determined to be December 31, 1992.
Consequently, as from January 1, 1993, for U.S. GAAP purposes, this conversion
has been implemented as follows:

    (1) Dollar values which had been maintained on an historical accounting
        basis (such as land, buildings, machinery and equipment, investments,
        etc.) have been translated into NIS at the exchange rate ruling at
        December 31, 1992.

    (2) Shareholders' equity has been translated on an historical basis.

The treatment of transactions carried out during the year was as follows:

    (1) Depreciation of assets converted according to 1. Above was computed
        on the new NIS value over the remaining useful lives of the assets.

    (2) All other transactions have been presented on the same basis as the
        nominal consolidated financial statements. Section B of this note
        explains the differences between the nominal NIS financial statements
        prepared according to Israeli GAAP and the financial statement data
        presented in NIS according to U.S. GAAP for the purposes of PEC.

    (3) Deferred taxes associated with the temporary difference that arise
        from a change in functional currency when an economy ceases to be
        considered highly inflationary, are reflected (as per FASB's EITF
        92-8) as an adjustment to the cumulative translation adjustments
        component of shareholders' equity.

                                     55

<PAGE>

                                               Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
-------------------------------------------------------------------------------

Note 23--Consolidated Financial Data Presented According to U.S. GAAP (cont'd)

B. The main differences between the financial statements contained in
   Sections C, D and E of this note prepared according to U.S. GAAP and the
   financial statements prepared according to Israeli GAAP are as follows:

    (1) Warrants issued to employees

        Warrants issued to employees free of charge were recorded as an expense
        in 1993 in these financial statements in accordance with U.S. GAAP.
        The warrants issued to employees were recorded as an expense in the
        nominal shekels financial statements in 1994 at the amount which was
        taxable to the employees--see Note 13B (5).

        The tax effect of this expense is included in the nominal NIS
        financial statements in the Statement of Income. For the purposes of
        the financial statements contained in this Note, prepared according
        to U.S. GAAP, the tax effect is included partially in the Statement
        of Income and the remainder is added to paid-in capital.

    (2) Reserves in Shareholders' equity

        Land, buildings, machinery and equipment were revalued in 1982 and a
        capital reserve was created in the nominal financial statements as
        permitted by Israeli GAAP. These assets are stated at historical cost
        and no capital reserves exist in the financial statements that follow
        in accordance with U.S. GAAP.

    (3) Deferred credit (negative goodwill)

        The consolidated nominal NIS financial statements include a deferred
        credit amortized over five to the years, as permitted by Israeli
        GAAP. For the purposes of the financial statements contained in this
        note, prepared according to U.S. GAAP, property, plant and equipment
        have been reduced by the excess cost over the assigned value of net
        assets acquired.

    (4) Dividends declared

        According to Israeli GAAP, dividend from the earnings of a year are
        accrued at the end of that year even though they are approved after
        that year's end. For the purposes of the financial statements
        contained in this note, these dividends have not been accrued since,
        according to U.S. GAAP, dividends are reflected as a liability when
        declared.

                                   56
<PAGE>

                                            Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
----------------------------------------------------------------------------

Note 23--Consolidated Financial Data Presented according to U.S. GAAP
         (cont'd)

C. Balance Sheets

<TABLE>
<CAPTION>
                                                                                       December 31,  December 31,
                                                                                           1997          1996
                                                                                       ------------  ------------
<S>                                                                                    <C>           <C>
                                                                                             NIS Thousands
Assets

Current assets

Cash and cash equivalents                                                                   31,409        57,275
Marketable securities                                                                       52,782        52,161
Accounts receivable--trade and others                                                      213,607       180,349
Bank deposits                                                                               17,191         3,328
Inventories                                                                                104,831       101,790
                                                                                       ------------  ------------
                                                                                           419,820       394,903
                                                                                       ------------  ------------
Investments and long-term assets

Affiliated companies and others                                                             26,747        20,927
Bank deposits and other receivables                                                          3,545        15,536
Deferred taxes, net                                                                          5,333         6,949
                                                                                       ------------  ------------
                                                                                            35,625        43,412
                                                                                       ------------  ------------
Property, plant and equipment

Cost                                                                                       330,517       336,256
Less--accumulated depreciation                                                             173,293       187,671
                                                                                       ------------  ------------
                                                                                           157,224       148,585
                                                                                       ------------  ------------
Intangible assets, net                                                                       1,386        14,101
                                                                                       ------------  ------------
                                                                                           614,055       601,001
                                                                                       ------------  ------------
                                                                                       ------------  ------------
</TABLE>
                                       57


<PAGE>

                                            Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
----------------------------------------------------------------------------

Note 23--Consolidated Financial Data Presented according to U.S. GAAP
         (cont'd)

C. Balance Sheets (cont'd)

<TABLE>
<CAPTION>
                                                                                       December 31,  December 31
                                                                                           1997          1996
                                                                                       ------------  ------------
<S>                                                                                    <C>           <C>
                                                                                             NIS Thousands
Liabilities and Shareholders' Equity

Current liabilities

Bank credits and others                                                                     26,395        23,564
Accounts payable--trade and others                                                          90,173        73,626
                                                                                       ------------  ------------
                                                                                           116,568        97,190
                                                                                       ------------  ------------
Long-term liabilities

Long-term debt                                                                               3,532         6,557
Liability regarding termination of employee-employer relationship, net                       8,008         1,965
                                                                                       ------------  ------------
                                                                                            11,540         8,522
                                                                                       ------------  ------------
Minority interest                                                                           33,553        30,915
                                                                                       ------------  ------------
Shareholders' equity

Share capital                                                                               80,561        80,561
Paid-in capital                                                                            144,721       144,721
Foreign currency translation adjustment                                                      1,703         1,703
Retained earnings                                                                          226,429       238,409
                                                                                       ------------  ------------
                                                                                           453,414       465,394
Less: Treasury Stock                                                                         1,020         1,020
                                                                                       ------------  ------------
                                                                                           452,394       464,374
                                                                                       ------------  ------------
                                                                                           614,055       601,001
                                                                                       ------------  ------------
                                                                                       ------------  ------------
</TABLE>

                                       58



<PAGE>

                                            Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
----------------------------------------------------------------------------

Note 23--Consolidated Financial Data Presented according to U.S. GAAP
         (cont'd)

D. Statements of Income

<TABLE>
<CAPTION>
                                                                                       Year Ended December 31,
                                                                                   -------------------------------
                                                                                     1997       1996       1995
                                                                                   ---------  ---------  ---------
                                                                                            NIS Thousands
                                                                                   -------------------------------
<S>                                                                                <C>        <C>        <C>
Revenue from sales                                                                   617,914    570,758    481,997
Cost of sales                                                                        389,635    360,492    312,207
                                                                                   ---------  ---------  ---------
Gross profit                                                                         228,279    210,266    169,790
                                                                                   ---------  ---------  ---------
Selling and marketing expenses                                                       125,294     98,051     76,072
General and administrative expenses                                                   46,347     38,932     30,006
                                                                                   ---------  ---------  ---------
                                                                                     171,641    136,983    106,078
                                                                                   ---------  ---------  ---------
Operating income                                                                      56,638     73,283     63,712
Financing income, net                                                                 13,018     16,556     14,810
                                                                                   ---------  ---------  ---------
Operating income                                                                      69,656     89,839     78,522
Other income, net                                                                      1,192      3,289      3,412
                                                                                   ---------  ---------  ---------
Income before income taxes                                                            70,848     93,128     81,934
Income taxes                                                                          14,595     18,126     19,550
                                                                                   ---------  ---------  ---------
Net income after income taxes                                                         56,253     75,002     62,384
Equity in earnings (losses) of affiliated companies, net                                (630)       238       (500)
Minority interest in consolidated subsidiaries' income                                (3,653)    (6,555)    (1,751)
                                                                                   ---------  ---------  ---------
Net income from continuing operations                                                 51,970     68,685     60,133
Net income from discontinued operations                                                5,805      3,735     --
                                                                                   ---------  ---------  ---------
Net income                                                                            57,775     72,420     60,133
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
</TABLE>
                                       59


<PAGE>

                                            Tambour Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1997
----------------------------------------------------------------------------

Note 23--Consolidated Financial Data Presented according to U.S. GAAP
         (cont'd)

E. Statement of Changes in Shareholders' Equity

<TABLE>
<CAPTION>
                                                                                             Foreign                 Company
                                                                 Additional    Proceeds     Currency                 Shares
                                                        Share      Paid-in    from issue   Translation  Retained   Acquired by
                                                       Capital     Capital    of Warrants  Adjustments  Earnings   Subsidiary
                                                      ---------  -----------  -----------  -----------  ---------  -----------
                                                                                   NIS Thousands
                                                      ------------------------------------------------------------------------
<S>                                                   <C>        <C>          <C>          <C>          <C>        <C>
Balance as of January 1, 1995                            80,561     131,161       13,560        1,703     175,856      --

In the year 1995:

Expiration of warrant                                    --         *13,560     *(13,560)      --          --          --
Net income                                               --          --           --           --          60,133      --
Cash dividend                                            --          --           --           --         (30,000)     --
                                                      ---------  -----------  -----------       -----   ---------  -----------
Balance as of December 31, 1995                          80,561     144,721       --            1,703     205,989      --

In the year 1996:

Net income                                               --          --           --           --          72,420      --
Cash Dividend                                            --          --           --           --         (40,000)     --
Company shares acquired by subsidiary                    --          --           --           --          --          (1,020)
                                                      ---------  -----------  -----------       -----   ---------  -----------
Balance as of December 31, 1996                          80,561     144,721       --            1,703     238,409      (1,020)

In the year 1997:

Net income                                               --          --           --           --          57,775      --
Cash Dividend                                            --          --           --           --         (69,755)     --
                                                      ---------  -----------  -----------       -----   ---------  -----------
Balance as of December 31, 1997                          80,561     144,721       --            1,703     226,429      (1,020)
                                                      ---------  -----------  -----------       -----   ---------  -----------
                                                      ---------  -----------  -----------       -----   ---------  -----------
</TABLE>



*   Net of issue and registration expenses, after tax effect.

                                       60

<PAGE>

                                            Tambour Limited and Subsidiaries


Appendix--Consolidated and Affiliated Companies as of December 31,1997

<TABLE>
<CAPTION>
                                                                                                  Percentage of
                                                                                                     Control
                                                                                               -------------------
<S>                                                                                            <C>
Consolidated companies

S.D.L. Technology (sol) Ltd.                                                                             71.00
S.D.L. partnership                                                                                       98.55
R.R.E. Rotem Engineering Ltd.                                                                            85.00
Gains Properties Ltd.                                                                                    77.66
Gil--the Israeli Marketing Paint Company*                                                                24.00
Tambour Holdings 1993 Ltd.                                                                              100.00
Tambour Ecology Ltd.                                                                                     66.00
Tambour investments 1996 Ltd.                                                                           100.00
Tambourechev. 1997 Ltd.                                                                                 100.00
Safety Kleen (Israel) Ltd.                                                                               59.40
Scliab Laboratories Manufacturing Chemists Ltd.                                                          77.66
Sicca Israel Chemical Enterprises Ltd.                                                                   77.66
Tzevah Paint Industries Ltd.                                                                            100.00
Tzah--Israeli Printing Inks Ltd.                                                                         80.00
R.D. Glaso-Center Ltd.                                                                                  100.00
Serafon Resinous Chemicals Corp. Ltd.**                                                                  56.15
Tovalah Ltd.                                                                                            100.00
T.P. Developments Establishment                                                                         100.00
Cotachem Farben G.M.B.H                                                                                 100.00
Tambour Paints (Hellas) LLC                                                                             100.00
Kedem Chemicals Ltd.**                                                                                   77.66

Affiliated companies

Diverseylever Israel Ltd.                                                                                38.75
Vertigo Robotics Technology Ltd.                                                                         37.50
Kne Uvne Marketing (1992) Ltd.                                                                           20.00
British Paints L.L.C.                                                                                    18.15
International Ilios Cotachem S.A.                                                                        43.00
Tambour Switzerland                                                                                     100.00

Partnerships
Kne Ubne Limited Partnership                                                                             20.00
</TABLE>
                                       61

<PAGE>


                                            Tambour Limited and Subsidiaries

Appendix - Consolidated and Affiliated Companies as of December 31, 1997
----------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                  Percentage of
                                                                                                     Control
                                                                                               -------------------
<S>                                                                                            <C>

Inactive Companies
Ayalon Water Purification Ltd.                                                                          10.000
Engel-Aniam Ltd.                                                                                         33.00
Askar Ltd.                                                                                              100.00
Ecogen Ltd.                                                                                              77.66
Hamerakeh--Hydrohamer Ltd.                                                                               66.00
Tambour polimers Lts.                                                                                   100.00
Activated Carbon Technologies Ltd.                                                                       33.00
Tambourechev Ltd.                                                                                       100.00
Chemetal Ltd.                                                                                           100.00
Memberfil Ltd.                                                                                           50.00
Nad (Investments) Ltd.                                                                                  100.00
C.T.I. Inks (1983) Ltd.                                                                                  80.00
Kedem Asset and Investment Management (1991) Ltd.                                                        77.66
Kedem Chemicals Technologies Ltd.                                                                        77.66
Tamarin (Marine Paints) Ltd.                                                                            100.00
</TABLE>



*   100% ownership and control, in effect.

**  Traded on the Tel-Aviv Stock Exchange.


                                           62


<PAGE>

                    [LETTERHEAD OF ROJANSKY, HALIFI, MEIRI & CO.]


                      REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                               TO THE SHAREHOLDERS OF
                        CANIEL - ISRAEL CAN COMPANY LIMITED

We have audited the Balance Sheets pertaining to Caniel - Israel Can Company
Limited (hereafter the Company) as of December 31, 1997 and 1996 and the
Consolidated Balance Sheets as of same dates, the related Statements of Income
and Statements of changes in Shareholders' Equity as well as the Statements of
Cash Flows - Company's and Consolidated - pertaining to each of the three years
within the period ended on 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 have not audited the Financial Statements pertaining to Consolidated
Companies, the assets of which accounted for in the consolidation approximate 2%
and 1% of the overall consolidated assets as of December 31, 1997 and 1996,
respectively.  The Financial Statements pertaining to these Companies have been
audited by other Certified Public Accountants whose reports were provided to us,
therefore our opinion, as far as it relates to the figures accounted for as to
these Companies, is based on these other Certified Public Accountants' Reports.

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 United States.  These standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. 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 applied 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 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 Notes 22 - 23  to the financial statements.

In our opinion, based on our audit and the reports of other auditors, the above
mentioned financial statements present fairly the financial position - Company's
and consolidated - as of December 31, 1997 and 1996, the results of their
operations, the changes in shareholder's equity and cash flows - Company's and
consolidated -  for each of the three years in the period ended December 31,
1997, 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 25 to the
financial statements.


                                               /s/ ROJANSKY, HALIFI, MEIRI & CO.
                                               ---------------------------------
Tel-Aviv, March 5, 1998.                       ROJANSKY, HALIFI, MEIRI & CO.
                                               CERTIFIED PUBLIC ACCOUNTANTS

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF ELRON ELECTRONIC INDUSTRIES LTD.

We have audited the accompanying balance sheets of Elron Electronic Industries
Ltd., (the "Company") as of December 31, 1997 and 1996, the consolidated balance
sheet of the Company and its subsidiary as of December 31, 1997, the related
statements of income, shareholders' equity and cash flows for the years ended
December 31, 1997, 1996 and 1995, the consolidated statement of income and the
consolidated statement of cash flows for the year 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
in Israel and the United States, including those prescribed by the Auditors'
(Mode of Performance) Regulations (Israel), 1973.  Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the 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, shareholders' equity
and cash flows of the Company and consolidated for the years ended December 31,
1997, 1996 and 1995, in conformity with accounting principles generally accepted
in Israel (as to reconciliation to accounting principles generally accepted in
the United States - see Note 2L).




Luboshitz, Kasierer & Co.               Ratzkovsky Fried & Co.
Member Firm of Arthur Andersen          Certified Public Accountants (Israel)




Haifa, Israel

March 9,1998

<PAGE>

                        AUDITORS' REPORT TO THE SHAREHOLDERS
                                         OF
                             GENERAL ENGINEERS LIMITED


We have audited the accompanying balance sheets of General Engineers Limited
("the Company") as of December 31, 1997 and 1996 and the statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997, expressed in New Israel Shekels. These financial
statements are the responsibility of the board of directors and management of
the Company. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards, including standards prescribed by 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 differences between
generally accepted Israeli auditing standards and auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to an error in the financial
statements or to 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 management of the
Company, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a fair basis for our opinion.

The above financial statements were 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 financial statements in nominal values, on the basis of which
the adjusted financial statements were prepared, are presented in Note 14 to the
financial statements.

In our opinion, based on our audits, the abovementioned financial statements
present fairly, in all material respects, the financial position of the Company
as of December 31, 1997 and 1996, the results of its operations, the changes in
its shareholders' equity and the cash flows for each of the three years in the
period ended December 31, 1997, 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 15 to the
financial statements.


/s/ Braude Bavly
-------------------------
Braude Bavly

Tel Aviv, February 12, 1998


<PAGE>

             [LETTERHEAD OF KESSELMAN & KESSELMAN AND COOPERS & LYBRAND]


                           REPORT OF INDEPENDENT AUDITORS

To the Shareholders of

GILAT COMMUNICATIONS LTD.


We have audited the consolidated balance sheets of Gilat Communications Ltd.
(the "Company") and its subsidiaries 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 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 Israsat International
Communications Ltd. (a wholly-owned subsidiary; through June 30, 1997 - a
proportionately consolidated company, see also note 2), whose assets, included
in consolidation, constitute approximately 3.3%; and 7.9% of total consolidated
assets as of December 31, 1997 and 1996, respectively, and whose revenues,
included in consolidation, constitute approximately 28.2%; 13.5% and 20.4% of
total consolidated revenues for the years ended December 31, 1997, 1996 and
1995, respectively. Those financial statements were audited by other independent
auditors, whose report has been furnished to us  and our opinion, insofar as it
relates to amounts included for this company, is based solely on the report 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 audit 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
report of the other  independent auditors provide a fair basis for our opinion.

In our opinion, based upon our audits and the report of the other independent
auditors referred to above, the aforementioned financial statements present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 1997 and 1996 and the results of
their operations, the changes in shareholders' equity and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles ("GAAP") in Israel (as applicable
to these financial statements, Israeli GAAP and U.S. GAAP are practically
identical in all material respects, except as described in note 14).




                                             /s/ Kesselman & Kesselman
                                             -----------------------------------
Tel-Aviv, Israel                                   Kesselman & Kesselman
     February 9, 1998                        Certified Public Accountants (Isr.)


<PAGE>

             [LETTERHEAD OF KESSELMAN & KESSELMAN AND COOPERS & LYBRAND]


                           REPORT OF INDEPENDENT AUDITORS

To the shareholders of

GILAT SATELLITE NETWORKS LTD.

We have audited the consolidated balance sheets of Gilat Satellite Networks Ltd.
(the "Company") and its subsidiaries 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 Board of
Directors and management. Our responsibility is to express an opinion on these
financial statements based on our audits.

In 1996, following the merger of the Company and Skydata, Inc. ("Skydata"),
which was accounted for as a pooling of interests, the consolidated financial
statements for all years prior to the merger were restated (see note 2). We did
not audit the financial statements of Skydata for the years ended December 31,
1997, 1996 and 1995. The assets of Skydata at December 31, 1997 and 1996
constitute approximately 3.8% and 5.7%, respectively, of total consolidated
assets, and its sales for the years ended December 31, 1997, 1996 and 1995
constitute approximately 16.7%, 28.6% and 23.5%, respectively, of total
consolidated sales. The financial statements of Skydata were audited by other
independent auditors, whose report has been furnished to us, and our opinion,
insofar as it relates to amounts included for Skydata, is based solely on the
report 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
report of the other independent auditors provide a fair basis for our opinion.

In our opinion, based upon our audits and the report of the other independent
auditors referred to above, the aforementioned financial statements present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 1997 and 1996 and the results of
their operations, the changes in shareholders' equity and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles in Israel and in the United
States (as applicable to these financial statements, such accounting principles
are practically identical).



                                             /s/ Kesselman & Kesselman
                                             -----------------------------------
Tel-Aviv, Israel                                   Kesselman & Kesselman
     February 26, 1998        Certified Public Accountants (Isr.)

<PAGE>

             [LETTERHEAD OF KESSELMAN & KESSELMAN AND COOPERS & LYBRAND]


                                  AUDITORS' REPORT

                               To the shareholders of

                              KLIL INDUSTRIES LIMITED


We have audited the financial statements of Klil Industries Limited (hereafter -
the company) and the consolidated financial statements of the company and its
subsidiary: balance sheets as of December 31, 1997 and 1996, and 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 the associated company, the
company's share in the equity of which as of December 31, 1997 and 1996 amounts
to adjusted NIS 270,000 and adjusted NIS 360,000, respectively, and the
company's share in the losses of which amounts in 1997 to adjusted NIS 90,000;
1996 adjusted NIS 81,000. Those statements were audited by other auditors, whose
reports have been furnished to us, and our opinion, insofar as it relates to
amounts included for the foregoing company, is based solely on the reports of
the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed by the Auditors (Mode of Performance)
Regulations, 1973. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement, either due to error or to ententional 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 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 12.


<PAGE>

          [LETTERHEAD OF KESSELMAN & KESSELMAN COOPERS & LYBRAND]


In our opinion, based upon our audits and the reports of the other auditors
referred to above, 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 generally accepted accounting principles.  Also, in our opinion,
the abovementioned financial statements have been prepared in accordance with
the Securities (Preparation of Annual Financial Statements) Regulations, 1993.

Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States.  The
application of the latter would have affected the determination of
nominal/historical net income and shareholders' equity to the extent summarized
in note 13.








/s/ Kesselman & Kesselman
-------------------------
Kesselman & Kesselman
    Haifa, Israel
    March 3, 1998

<PAGE>

                                                         605 Third Avenue
                                                         New York, NY 10158-0142
                                                         TEL 212 599-0100
                                                         FAX 212 370-4520


                                                          Grant Thornton
                                                          GRANT THORNTON LLP
                                                          Accountants and
                                                          Management Consultants

                                                    The U.S. Member Firm of
                                                    Grant Thornton International

                         REPORT OF INDEPENDENT CERTIFIED
                               PUBLIC ACCOUNTANTS


Board of Directors
    Level 8 Systems, Inc. and Subsidiaries


         We have audited the consolidated balance sheet of Level 8 Systems, Inc.
         and Subsidiaries as of December 31, 1997, and the related consolidated
         statements of operations, shareholders' equity and cash flows for the
         year then ended. These financial statements are the responsibility of
         the Company's management. Our responsibility is to express an opinion
         on these financial statements based on our audit. The financial
         statements of Level 8 Systems, Inc. and Subsidiaries as of and for each
         of the two years ended December 31, 1996, were audited by other
         auditors whose report dated January 31, 1997, expressed an unqualified
         opinion on those statements.

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

         In our opinion, the 1997 financial statements referred to above present
         fairly, in all material respects, the consolidated financial position
         of Level 8 Systems, Inc. and Subsidiaries as of December 31, 1997, and
         the consolidated results of their operations and their consolidated
         cash flows for the year then ended, in conformity with generally
         accepted accounting principles.


GRANT THORNTON LLP
New York, New York
February 23,1998 (except for Note N, as to which
   the date is February 27, 1998)




<PAGE>
                             JUNGERMAN, GILBOA, SILBER
                        CERTIFIED PUBLIC ACCOUNTANTS (ISR.)


DAVID GILBOA C.P.A. (ISR.)
KOBI SILBER C.P.A. (ISR.)

                        AUDITORS' REPORT TO THE SHAREHOLDERS
                                         OF
                               LIRAZ SYSTEMS LIMITED


We have audited the accompanying balance sheet of Liraz Systems Limited
(hereinafter - "the Company") as of December 31, 1997, and 1996 and the
Consolidated Balance Sheets as of these dates, and the Statements of Operations,
Statement of changes in Shareholders' Equity and Statement of Cash Flows of the
Company and consolidated - for each of the three years 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 on the basis of our examination.

We did not audit the financial statements of consolidated companies, whose
assets constitute approximately 48.1% and approximately 60.9% of total
consolidated assets as of December 31, 1997 and 1996 respectively, and whose
revenues constitute approximately 48.6%, 60.6% and 50.6% of total consolidated
revenues for the year ended December 31, 1997,  1996 and 1995 respectively. The
financial statements of these companies were audited by other auditors, whose
reports were furnished to us, and our opinion, insofar as it relates to the
amounts included in respect of these companies, is based 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. 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 the Company's 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 convention, adjusted to reflect changes in the general
purchasing power of the Israel 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 31.

In our opinion, based on our audit and on the reports of the other auditors, the
financial statements referred to above, present fairly, in all material
respects, the financial position - of the Company and consolidated - as of
December 31, 1997 and 1996, and results of its operations, changes in
shareholders' equity and cash flows for each of the three years ended December
31, 1997, in conformity with generally accepted accounting principles.

In our opinion, the above-mentioned financial statements have been prepared in
conformity with the Securities Regulations (Preparation of Annual Financial
Statements),1993.



                                                   JUNGERMAN, GILBOA, SILBER
                                                  Certified Public Accountants
TEL AVIV, MARCH 16,1998


  Address: Rechov Aminadav 23, Tel-Aviv 67898, Fax: 03-5627190, Tel: 03-5622332


<PAGE>

KOST LEVARY & FORER
       A MEMBER OF
ERNST & YOUNG INTERNATIONAL



                            Report of independent auditors

                                to the shareholders of

              LOGAL Educational Software and Systems Ltd. and Subsidiary


     We have audited the consolidated balance sheets of LOGAL Educational
Software and Systems Ltd. and its subsidiary at 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 conducted our audits in accordance with generally accepted auditing
standards in Israel, including those prescribed by the Auditors Regulations
(Mode of Performance) (Israel), 1973, which do not differ in any material
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.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the aforementioned consolidated financial statements
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiary at December 31, 1996 and 1997, and the
consolidated 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 in Israel.  As applicable to the Company's
financial statements, accounting principles generally accepted in the United
States and Israel are substantially identical in all material respects.

Tel Aviv, Israel                               KOST, LEVARY and FORER
February 16, 1998                        Certified Public accountants (Israel)
                                        A member of Ernst & Young International


<PAGE>

             [LETTERHEAD OF KESSELMAN & KESSELMAN AND COOPERS & LYBRAND]



                                   AUDITORS' REPORT

To the shareholders of

MUL-T-LOCK LIMITED



We have audited the financial statements of Mul-T-Lock Limited (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 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 3.1% and 1.7% of total consolidated assets as of
December 31, 1997 and 1996, respectively, and whose turnover constitutes
approximately 5.2%, 3.4% and 2.7%, of total consolidated turnover for the years
ended December 31, 1997, 1996 and 1995, respectively. Those statements were
audited by other auditors, whose reports have been furnished to us, and our
opinion, insofar as it relates to amounts included for the foregoing
subsidiaries, is based solely on the reports of the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed by the Auditors (Mode of Performance)
Regulations, 1973.  Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement, 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
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 16.


<PAGE>

             [LETTERHEAD OF KESSELMAN & KESSELMAN AND COOPERS & LYBRAND]


In our opinion, based upon our audits and the reports of the other auditors
referred to above, 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
generally accepted accounting principles.   Also, in our opinion, the
abovementioned financial statements have been prepared in accordance with the
Securities (Preparation of Annual Financial Statements) Regulations, 1993.

Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of
nominal/historical net income and shareholders' equity to the extent summarized
in note 17.



                                             /s/ Kesselman & Kesselman
                                             -----------------------------------
Tel-Aviv,                                           Kesselman & Kesselman
     March 10, 1998                          Certified Public Accountants (Isr.)

<PAGE>

                      [LETTERHEAD OF H.H.S.L. Haft & Haft & Co.]

                            [LOGO OF NEXIA INTERNATIONAL]


    AUDITORS' REPORT TO THE SHAREHOLDERS OF PEC ISRAEL FINANCE CORPORATION LTD.
                            FOR PARENT COMPANY PURPOSES



We have audited the accompanying balance sheets of PEC Israel Finance
Corporation Ltd. as of December 31, 1997 and 1996, and the related statements of
profit and loss, changes in shareholders'  equity and of  cash flows for the
three years ended. These financial statements are the responsibility of the
Company's Board of Directors and management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

The aforementioned financial statements have been prepared on the basis of
historical cost, adjusted to the 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 9.

In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997 and
1996, and of the results of its operations, changes in shareholders' equity and
cash flows for the three years then ended, in accordance with generally accepted
accounting principles

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 not have materially affected the determination
of nominal / historical net profit nor shareholders' equity for the year ended
December 31, 1997.



                                        /s/ H.H.S.L. Haft & Haft & Co.
                                        -------------------------------------
                                             H.H.S.L. Haft & Haft & Co.
March 26, 1998                          Certified  Public  Accountants (Isr.)



<PAGE>

                                 ARTHUR ANDERSEN LLP

                                                            --------------------
                                                            Harbour Centre
                                                            PO Box 1929
                                                            Grand Cayman
                                                            Cayman Island BWI


                         REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders of Renaissance Fund LDC:

We have audited the accompanying statements of assets and liabilities, including
the schedule of investments, of Renaissance Fund LDC (a Cayman Islands Limited
Duration Corporation) as of December 31, 1997 and 1996, and the related
statements of operations, changes in net assets and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with 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 management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Renaissance Fund LDC as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles in the United States.

As explained in Notes 1 and 4, the financial statements include portfolio
investments valued at $133,469,181 (92.22% of net assets) and $127,885,638
(90.56% of net assets) at December 31, 1997 and 1996, respectively, whose values
have been estimated by the Fund's Manager in the absence of readily
ascertainable market values. 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.


Arthur Andersen LLP


Grand Cayman, B.W.I.
February 10,1998


<PAGE>

             [LETTERHEAD OF KESSELMAN & KESSELMAN AND COOPERS & LYBRAND]


                            REPORT OF INDEPENDENT AUDITORS

To the shareholders of

SCITEX CORPORATION LTD.


We have audited the consolidated balance sheets of Scitex Corporation Ltd. (the
"Company") and its subsidiaries as of 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 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 by the Israeli Auditors (Mode of
Performance) Regulations, 1973. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement, 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 provide
a fair basis for our opinion.

In our opinion, the aforementioned financial statements present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 1997 and 1996 and the results of their
operations, the changes in shareholders' equity and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
accounting principles generally accepted in the United States.



                                             /s/ Kesselman & Kesselman
                                             -----------------------------------
Tel-Aviv, Israel                                  Kesselman & Kesselman
     February 11, 1998                       Certified Public Accountants (Isr.)
     (except for notes 9 and 17 as to
       which the date is February 25, 1998)

<PAGE>

                     [LETTERHEAD OF LUBOSHITZ, KASIERER & CO.]



                      REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


TO THE SHAREHOLDERS OF
     TEFRON LTD.


We have audited the accompanying consolidated balance sheets of TEFRON LTD. (an
Israeli corporation) as of December 31, 1996 and 1997, 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 conducted our audits in accordance with generally accepted auditing standards
in Israel and in the United States, 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 management as well
as evaluating the overall financial statement presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 1996 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with accounting principles generally accepted in the United
States.




                                                  /s/ LUBOSHITZ, KASIERER & CO.
                                                  ------------------------------
                                                    LUBOSHITZ, KASIERER & CO.
                                                  MEMBER FIRM OF ARTHUR ANDERSEN

Tel-Aviv, Israel.
February 11, 1998.


<PAGE>

                         [LETTERHEAD OF KOST LEVARY & FORER]


Messrs.: D.I.C. Ltd.
PEC Israel Economic Corporation
-------------------------------


          Re:  Financial statements of Tel-Ad Jerusalem Studios Ltd.
               ("the Company") remeasured into Nominal NIS
               -----------------------------------------------------


     We have audited the accompanying balance sheets of Tel-Ad Jerusalem Studios
Ltd. (an Israeli corporation) as of December 31, 1997 and 1996, and the related
statements of income and changes in shareholders' equity 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 by the Israel regulations (Mode of
Performance), 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 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.

     These financial statements are to be read in conjunction with the
accompanying primary audited financial statements of the company, see Note 2.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1997 and 1996, the results of its operations and changes in its
stockholders' equity 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 3 to the financial statements).




                                        /s/ KOST LEVARY & FORER
                                        ---------------------------------------
Tel-Aviv, Israel.                                 KOST LEVARY & FORER
March 4, 1998.                       Certified Public Accountants (Israel)
                                        A Member of Ernst & Young International


                                         -39-

<PAGE>

                            [LETTERHEAD OF SOMEKH CHAIKIN]


Tel-Aviv, February 14, 1997




Report of Independent Public Accountants
Cellcom Israel Ltd.


We have audited the balance sheet of Cellcom Israel Ltd. (hereinafter the
"Company") as of December 31, 1996, the related statements of income and
shareholders' equity 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 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 in historical values which formed the basis of the adjusted
statements appear in Note 23 to the financial statements.


<PAGE>

In our opinion, based on our audit and on the report of the abovementioned other
auditors, the above mentioned financial statements present fairly the financial
position of the company as at December 31, 1996, the results of its operations,
the changes in shareholder's equity and cash flows for each of the two years in
the period ended December 31, 1996, 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
nominal/historical net profit (loss) and shareholders' equity.




/s/ Somekh Chaikin
-----------------------------------
Somekh Chaikin
Certified Public Accountants (Isr.)

<PAGE>

                            [LETTERHEAD OF SOMEKH CHAIKIN]


Tel-Aviv, March 17, 1997


Report of Independent Public Accountants to
the Shareholders of DIC and PEC Cable TV Ltd.


We have audited the balance sheet of DIC and PEC Cable TV. Ltd. as of December
31, 1996, the related statements of income and shareholders' equity 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
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 in historical values which formed the basis of the adjusted
statements appear in Note 4 to the financial statements.

<PAGE>

In our opinion, based on our audit, the above mentioned financial statements
present fairly the financial position of the company as at December 31, 1996,
the results of its operations, the changes in shareholder's equity and cash
flows for each of the two years in the period ended December 31, 1996, 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
nominal/historical net profit (loss) and shareholders' equity to the extent
summarized in Note 5 to the financial statements.





/s/ Somekh Chaikin
-----------------------------------
Somekh Chaikin
Certified Public Accountants (Isr.)

<PAGE>

                            [LETTERHEAD OF SOMEKH CHAIKIN]

Tel-Aviv, February 25 1997


Report of Independent Public Accountants
to the Shareholders of
Gemini Capital Fund Management Ltd.


We have audited the accompanying balance sheet of Gemini Capital Fund Management
Ltd. as at December 31, 1996, statements of income, changes in shareholders'
equity and cash flows for each of the two years the last of which ended on
December 31, 1996, 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
including those prescribed by the Israel Auditors' Regulations (Auditors' Mode
of Performance) - 1973.  Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement.  An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  We believe that our audits 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 Gemini Capital Fund Management
Ltd. as at December 31, 1996, and the results of its operations, changes in its
shareholder's equity and cash flows for each of the two years the last of which
ended on December 31, 1996, in conformity with accounting principles generally
accepted in the United States and Israel on the basis outlined in Note 2A to the
financial statements.





/s/ Somekh Chaikin
-----------------------------------
Somekh Chaikin
Certified Public Accountants

<PAGE>

                            [LETTERHEAD OF SOMEKH CHAIKIN]

Tel-Aviv, February 25, 1997


Report of independent Public Accountants
to the Partners of Gemini Israel Fund L.P.

We have audited the accompanying balance sheet of Gemini Israel Fund L.P. as of
December 31, 1996, statements of income, changes in partners capital and cash
flows for each of the two years the last of which ended on December 31, 1996,
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, including those prescribed by the Israel Auditors' Regulations
(Auditors' Mode of Performance).  These standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.  We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gemini Israel Fund as of
December 31, 1996, the results of its operations, changes in its partners
capital and cash flows for each of the two years the last of which ended
December 31, 1996 in conformity with accounting principles generally accepted in
the United States on the basis detailed in Note 2A to the financial statements.

As explained in Note 2, the financial statements include investments valued at
U.S. dollars 20,733 thousand (previous year - U.S. dollars 10,822 thousand) (75%
of partners capital at balance sheet date, previous year -56%) whose values have
been estimated by the Limited Partnership's general partner in the absence of
readily ascertainable market values.  We have reviewed the procedures used by
the general partner in arriving at its estimate 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 these 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/ Somekh Chaikin
-----------------------------------
Somekh Chaikin
Certified Public Accountants

<PAGE>

                            [LETTERHEAD OF SOMEKH CHAIKIN]

Tel-Aviv, March 4, 1997



Report of Independent Public Accountants to
the Shareholders of Ispah Holdings Limited


We have audited the balance sheet of Ispah Holdings Limited as of December 31,
1996, the related statements of income and shareholders' equity 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 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 in historical values which formed the basis of the adjusted
statements appear in Note 4 to the financial statements.


The data relating to the net asset value of the Company's investments in an
investee company and to its equity in that company's operating results, is based
on financial statements audited by other auditors.

<PAGE>

In our opinion, based on our audit and on the report of the abovementioned other
auditors, the above mentioned financial statements present fairly the financial
position of the company as at December 31, 1996, the results of its operations,
the changes in shareholder's equity and cash flows for each of the two years in
the period ended December 31, 1996, 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 nominal/
historical net profit (loss) and shareholders' equity to the extent summarized
in Note 5 to the financial statements.






/s/ Somekh Chaikin
-----------------------------------
Somekh Chaikin
Certified Public Accountants (Isr.)


<PAGE>

DELOITTE TOUCHE
       TOHMATSU
 IGAL BRIGHTMAN          -------------------------------------------------------
           &Co.          3 Daniel Frisch Street      Telephone: 972(3) 692-4111
                         Tel Aviv 64731 ISRAEL       Facsimile: 972(3) 696-0130
                         P.O.B. 16593, Tel-Aviv 61164


                             INDEPENDENT AUDITORS' REPORT
                    TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
                        "MAXIMA" - AIR SEPARATION CENTER LTD.
                        -------------------------------------


We have audited the accompanying balance sheet of "Maxima" - Air Separation
Center Ltd. ("the Company") as of December 31, 1996, 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 each of the two years in the period ended December 31, 1996,
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 did not audit the financial statements of a jointly controlled subsidiary
included under the proportionate consolidation method, whose assets constitute
approximately 5.2% of consolidated total assets as of December 31, 1996, and
whose revenues constitute approximately 7.1% and 8.3% of consolidated total
revenues for the years ended December 31, 1996 and 1995, 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 subsidiary, is based solely on the reports of the other
auditors.

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

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 30.



---------------       ----------------------------------------------------------
Deloitte Touche       Office in Jerusalem: New Clal Center 42 Agrippas Street
Tohmatsu              Jerusalem 94301, P.O.B. 28090, Jerusalem 91280, ISRAEL
International         Tel. 972 (2) 6235157 Fax. 972 (2) 6233628
                      Office in Haifa: 5 Ma'aleh Hashichrur Street, Haifa 33284,
                      P.O.B. 5648, Haifa 31055, ISRAEL
                      Tel. 972 (4) 8627373 Fax. 972 (4) 8672528

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


<PAGE>

         [LETTERHEAD OF DELOITTE TOUCHE TOHMATSU IGAL BRIGHTMAN & CO.]


In our opinion, based on our audits and the reports of the other auditors, the
financial statements present fairly, in all material respects, the financial
position - of the Company and on a consolidated basis - as at December 31,
1996, and the results of operations, changes in shareholders' equity and cash
flows - of the Company and on a consolidated basis, for each of the two in
the period ended December 31, 1996, in accordance with generally accepted
accounting principles in Israel. Furthermore, in our opinion, the financial
statements are prepared in accordance with the Israeli Securities Regulations
(Preparation of Annual Financial Statements) - 1993.

The financial information presented in accordance with generally accepted
accounting principles in the United States is based on nominal historical
data in Israeli currency and is included in Note 31 to the financial
statements.

Igal Brightman & Co.
Certified Public Accountants



Tel Aviv, February 26, 1997

<PAGE>

                            [LETTERHEAD OF SOMEKH CHAIKIN]

Tel-Aviv, March 13, 1997





Auditor's Report to the Shareholders of
Property and Building Corporation Limited


We have audited the financial statements of Property and Building Corporation
Limited (hereinafter "the Company") and the consolidated financial statements as
follows:

-    Balance sheet as at December 31, 1996
-    Statements of earnings, statements of changes in shareholders' equity and
     statements of cash flows for each of the two years the last of which ended
     on December 31, 1996.

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
the financial statements based on our audits.

We did not audit the financial statements of certain subsidiaries, including
those consolidated by the proportionate consolidation method, whose assets
constitute 72% of the total consolidated assets as at December 31, 1996 and
whose revenues constitute 90% and 86% of the consolidated revenues for the years
ended on December 31, 1996 and 1995 respectively.  The financial statements of
those subsidiaries were audited by other auditors whose reports thereon were
furnished to us.  Our opinion, insofar as it relates to amounts emanating from
the financial statements of such subsidiaries, is based solely on the said
reports of the other auditors.  Furthermore, the data included in the financial
statements which relates to the net asset value of an affiliate and the
Company's equity in its earnings is based on financial statements which were
audited by other auditors.

We conducted our audits in accordance with generally accepted auditing
standards, including standards prescribed by the Auditors Regulations (Auditor's
Mode of 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.  We believe that our audits provide a fair basis
for our opinion.


<PAGE>

As stated in Note 1D (17) the comparative figures are based on financial
statements which were restated and issued on May 30, 1996 (the original
statements were issued on March 18, 1996) in order to retroactively reflect a
change with which we concur in the accounting treatment of the recognition of
income from construction work by a subsidiary.

The above mentioned financial statements have been prepared on the basis of
historical cost, in historical values adjusted for the changes in the general
purchasing power of the Israel currency, in accordance with Opinions of the
Institute of Certified Public Accountants in Israel.  Condensed data in nominal
historical terms, on the basis of which the adjusted statements were prepared,
is presented in Note 34.

In our opinion, based on our audit and the reports of other auditors mentioned
above, the above mentioned financial statements present fairly, in all material
respects, in conformity with accounting principles, generally accepted in
Israel, the financial position of the Company and of the Company and its
subsidiaries on a consolidated basis as at December 31, 1996 and the changes in
shareholders' equity and the results of their operations and cash flows for each
of the two years ended on December 31, 1996.  Furthermore, these statements
have, in our opinion, been prepared in accordance with the Securities
Regulations (Preparation of Annual Financial Statements) - 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 historical
net profit and shareholders' equity to the extent summarized in Note 35 C to the
financial statements.




/s/ Somekh Chaikin
-----------------------------------
Somekh Chaikin
Certified Public Accountants (Isr.)

<PAGE>

                            [LETTERHEAD OF SOMEKH CHAIKIN]

Tel-Aviv March 11, 1997




Auditor's Report to the Shareholders of
Super-Sol Limited


We have audited the financial statements of Super-Sol Limited (the Company) and
the consolidated financial statements of the Company and its subsidiaries
detailed below:

-    Balance sheet as at December 31, 1996
-    Statements of income, changes in shareholders' equity and cash flows for
     the years ended on December 31, 1996 and 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
the financial statements based on our audit.

We have not audited the financial statements of certain consolidated companies
whose assets represent approximately 0.6% of the total assets included in the
consolidated balance sheet at December 31, 1996 and whose income represents
approximately 5.6% and 5.8% of the income included in the consolidated
statements of income for the years ended December 31, 1996 and 1995.  The
financial statements of these companies were audited by other auditors who
provided us with their reports and our opinion in as much as it relates to
amounts included in respect of these companies is based on the reports of the
other auditors.

Similarly the data relating to the equity value of investments in the
consolidated financial statements of investments in affiliated companies and to
the group's share in the results of these companies presented on an equity basis
are based on financial statements, 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 Regulations (Auditor's
Mode of 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.  We believe that our audits provide a reasonable
basis for our opinion.

<PAGE>

The above mentioned financial statements have been prepared on the basis of
historical cost, in historical values adjusted for the changes in the general
purchasing power of the Israel currency, in accordance with Opinions of the
Institute of Certified Public Accountants in Israel.  Condensed financial
statements in nominal historical terms, on the basis of which the adjusted
statements were prepared, as presented in Notes 29 and 30.

In our opinion, based on our audit and the reports of other auditors mentioned
above, 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 of the Company and its subsidiaries on a
consolidated basis as at December 31, 1996 and the changes in shareholders'
equity and the results of their operations and cash flows company and
consolidated for each of the two years ended on December 31, 1996.

Furthermore, these statements have, in our opinion, been prepared in accordance
with the Securities Regulations (Preparation of Annual Financial Statements) -
1983.

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 profit and shareholders' equity to the extent summarized in Note 31 to the
financial statements.




/s/ Somekh Chaikin
-----------------------------------
Somekh Chaikin
CERTIFIED PUBLIC ACCOUNTANTS (ISR.)

<PAGE>

                            [LETTERHEAD OF SOMEKH CHAIKIN]

Tirat HaCarmel, March 5, 1997




Independent Auditor's Report to the
Shareholders of Tambour Ltd.


We have audited the balance sheet of Tambour Ltd. (hereinafter the "Company")
and the balance sheet of the Company and subsidiary companies as at December 31,
1996, the related statements of income and shareholders' equity 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 Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

The financial statements of consolidated subsidiaries whose assets at December
31, 1996 comprised approximately 9.5% of the total assets in the Consolidated
Balance Sheet and whose revenues for the year ended December 31, 1996 comprised
approximately 12.4% of the total revenues in the Consolidated Statement of
income were audited by other auditors.  The data relating to these subsidiaries
included in the financial statements, are based on the financial statements
audited by these 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 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 21 to the financial statements.

<PAGE>

In our opinion, based on our audit and the financial statements audited by other
auditors, the above mentioned financial statements present fairly the financial
position of the Company and of the Company and subsidiary companies as at
December 31, 1996, the results of its operations, the changes in shareholder's
equity and cash flows for each of the two years in the period ended December 31,
1996, 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 nominal net
income and shareholders' equity to the extent summarized in Note 23 to the
financial statements.





/s/ Somekh Chaikin
-----------------------------------
Somekh Chaikin
Certified Public Accountants (Isr.)


<PAGE>

                                   SIGNATURES

            Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

                                    PEC ISRAEL ECONOMIC CORPORATION


Date: March 31, 1998            By: /s/ JAMES I. EDELSON
                                    -------------------------------
                                    James I. Edelson,
                                    Executive Vice President and
                                    Secretary

            Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

      Name                                  Date
      ----                                  ----

                                       March   , 1998
----------------------------
Raphael Recanati,
Chairman of the Board
of Directors



/s/ FRANK J. KLEIN                     March 31, 1998
----------------------------
Frank J. Klein,
President and Principal
Executive Officer; Director



/s/ WILLIAM GOLD                        March 31, 1998
----------------------------
William Gold,
Treasurer, Principal Financial
Officer and Principal Accounting
Officer

<PAGE>

      Name                                  Date
      ----                                  ----

/s/ ROBERT H. ARNOW                     March 31, 1998
----------------------------
Robert H. Arnow, Director


/s/ ALAN R. BATKIN                      March 31, 1998
----------------------------
Alan R. Batkin, Director


/s/ JOSEPH CIECHANOVER                  March 31, 1998
----------------------------
Joseph Ciechanover, Director


/s/ ELIAHU COHEN                        March 31, 1998
----------------------------
Eliahu Cohen, Director


/s/ ALAN S. JAFFE                       March 31, 1998
----------------------------
Alan S. Jaffe, Director


/s/ HERMANN MERKIN                      March 31, 1998
----------------------------
Hermann Merkin, Director


/s/ HARVEY M. MEYERHOFF                 March 31, 1998
----------------------------
Harvey M. Meyerhoff, Director


/s/ OUDI RECANATI                       March 31, 1998
----------------------------
Oudi Recanati, Director


/s/ ALAN S. ROSENBERG                   March 31, 1998
----------------------------
Alan S. Rosenberg, Director

<PAGE>

                                  EXHIBIT INDEX
                                                                        Page No.
                                                                        --------

(3)(i).     Composite Articles of Incorporation of the Company, as amended,
            filed as Exhibit 3(i) to the Company's Annual Report on Form 10-K
            for the fiscal year ended December 31, 1993 and incorporated herein
            by reference.

(3)(ii).    Composite By-Laws of the Company, as amended.                    262

10(i)(a).   Voting Agreement dated December 10, 1980 between the Company and
            Discount Investment Corporation Ltd. (formerly Discount Bank
            Investment Corporation Ltd.), as amended by a Letter Agreement dated
            May 4, 1983 and by an Addendum dated December 30, 1983, filed as
            Exhibit 10(i)(a) to the Company's Annual Report on Form 10-K for the
            fiscal year ended December 31, 1993 and incorporated herein by
            reference.

10(i)(b).   Addendum to Exhibit 10(i)(a) dated December 7, 1995, filed as
            Exhibit 10(i)(b) to the Company's Annual Report on Form 10-K for the
            fiscal year ended December 31, 1995 and incorporated herein by
            reference.

10(i)(c).   Amendment to Exhibit 10(i)(a) dated as of February 1, 1993, filed as
            Exhibit 10(i)(c) to the Company's Annual Report on Form 10-K for the
            fiscal year ended December 30, 1992 and incorporated herein by
            reference.

10(i)(d).   Shareholders' Agreement dated May 20, 1992 among Clal Electronics
            Industries Ltd., the Company, Discount Investment Corporation Ltd.
            and International Paper Company, filed as Exhibit A to Amendment No.
            13 to the Company's Statement on Schedule 13D in respect of ordinary
            shares of Scitex Corporation Ltd. held as of June 12, 1992 and
            incorporated herein by reference.

10(i)(e).   Business Opportunities Agreement dated as of November 30, 1993 among
            the Company, DIC Finance and Management Ltd., and, for the purpose
            of section 5 thereof only, PEC Finance Company Ltd. and Discount
            Investment Corporation Ltd., filed as Exhibit 10(i)(f) to the
            Company's Annual Report on Form 10-K for the fiscal year ended
            December 31, 1993 and incorporated herein by reference.

10(i)(f).   Amendment to Exhibit 10(i)(e) dated as of December 25, 1996, filed
            as Exhibit 10(i)(f) to the Company's Annual Report on Form 10-K for
            the fiscal year ended December 31, 1996 and incorporated herein by
            reference.

<PAGE>

                                                                        Page No.
                                                                        --------

10(i)(g).   Agreement dated July 1, 1995 between IDB Development Corporation
            Ltd. and PEC Finance Company Ltd. (now named PEC Israel Financial
            Corporation Ltd.), filed as Exhibit 10(i)(f) to the Company's Annual
            Report on Form 10-K for the fiscal year ended December 31, 1995 and
            incorporated herein by reference.

10(i)(h).   Voting Agreement dated June 10, 1997 by and among Discount
            Investment Corporation Ltd., the Company and Delek Investments and
            Properties Ltd.                                                  276

10(i)(i).   Application to Israel Discount Bank Ltd. dated March 4, 1998 for the
            Allocation of a Credit Line in Foreign Currency to the Company.  278

10(i)(k).   Agreement dated January 31, 1993 among the Company, DIC Energy
            Holdings Ltd. and N.E.K. Properties Ltd. in respect of ordinary
            shares of Tambour Ltd., filed as Exhibit 10(i)(k) to the Company's
            Annual Report on Form 10-K for the fiscal year ended December 31,
            1992 and incorporated herein by reference.

10(i)(i).   Exchange Agreement dated as of January 4, 1994 among the Company,
            PEC Holdings Limited and IDB Development Corporation Ltd., filed as
            Exhibit 10(i)(l) to the Company's Annual Report on Form 10-K for the
            fiscal year ended December 31, 1993 and incorporated herein by
            reference.

10(iii)(a). Supplemental Retirement Agreement dated as of January 1, 1995
            between the Company and Frank J. Klein, filed as Exhibit 10(iii)(b)
            to the Company's Annual Report on Form 10-K for the fiscal year
            ended December 31, 1994 and incorporated herein by reference.*

21.         Subsidiaries of the Registrant.                                  283

27.         Financial Data Schedule.                                         285

----------
*This is a management contract or a compensatory plan or arrangement required to
be filed as an exhibit.