SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K/A
                                      NO. 4

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

(Mark One)

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

For the fiscal year ended December 31, 1998
                          -----------------

                                       OR

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

For the transition period from ____________________ to  ____________________

                          Commission file number 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. |X|
<PAGE>

      The aggregate market value of the outstanding Common Stock of the
registrant held by non-affiliates on March 26, 1999 was approximately
$101,041,000. 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 26, 1999, 18,362,188 shares of Common Stock were outstanding.
<PAGE>

      The Registrant, PEC Israel Economic Corporation ("PEC" or the "Company"),
hereby amends (i) Item 8 of Part II of PEC's Annual Report on Form 10-K for the
year ended December 31, 1998, as previously amended (the "1998 Form 10-K"), by
replacing the financial statements of Property and Building Corporation Ltd.
("Property & Building") as at and for the year ended December 31, 1998 (the
"Prior Property & Building 1998 Financial Statements") with the financial
statements of Property & Building as at and for the year ended December 31, 1998
(the "Current Property & Building 1998 Financial Statements"), which begin four
pages after this page, the sole difference between the Prior Property & Building
1998 Financial Statements and the Current Property & Building 1998 Financial
Statements being a revised Note 35 in the Current Property & Building 1998
Financial Statements, and (ii) Item 14(a)(2)(f) of Part IV of the 1998 Form 10-K
by adding the following 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, 1998:

            Aclim 2000 (for Ecology) Limited, a subsidiary of Property and
              Building Corporation Ltd.

            Adir International Communications Services Corporation Ltd.

            ASE Advanced Systems Europe B.V., a subsidiary of Liraz Systems Ltd.

            Camdev Ltd.

            "Gad" Building Company Limited, a subsidiary of Property and
              Building Corporation Ltd.

            Galil Medical Ltd., a subsidiary of DEP Technology Holdings Ltd.

            Ham-Let U.S.A., Inc., a subsidiary of Ham-Let (Israel-Canada) Ltd.

            H.T. Components U.S.A., Inc., a subsidiary of Ham-Let (Israel-
              Canada) Ltd.

            I.C.P. - Israel Cable Programming Company Ltd., a subsidiary of DIC
              and PEC Cable TV Ltd.

            ISPRO The Israeli Properties Rental Corporation Ltd., a subsidiary
              of Property and Building Corporation Ltd.

            Level 8 Systems, Inc., a subsidiary of Liraz Systems Ltd.

            Liraz Systems Ltd.

            Logal Educational Software and Systems Ltd.

            Medi-Card Ltd., a subsidiary of DEP Technology Holdings Ltd.

            Merkaz Herzlia "A" Ltd., a subsidiary of Property and Building
              Corporation Ltd.

            Merkaz Herzlia "B" Ltd., a subsidiary of Property and Building
              Corporation Ltd.
<PAGE>

            Naveh Building and Development Ltd., a subsidiary of Property and
              Building Corporation Ltd.

            Netvision Ltd., a subsidiary of DIC and PEC Cable TV Ltd.

            Polyoptics Ltd., a subsidiary of Soreq Development Center (S.D.C.)
              Ltd.

            Renaissance Fund LDC

            Sano Dispec Development Ltd.

            Science Based Industries Campus Ltd., a subsidiary of Property and
              Building Corporation Ltd.

            Soreq Development Center (S.D.C.) Ltd.

            Verdeco Technologies Ltd., a subsidiary of DEP Technology Holdings
              Ltd.

            For the year ended December 31, 1997:

            Adir International Communications Services Ltd.

            ASE Advanced Systems Europe B.V., a subsidiary of Liraz Systems Ltd.

            Bayside Land Corporation Ltd., a subsidiary of Property and Building
              Corporation Ltd.

            Century Canning Industries Co. W.L.L., a subsidiary of Caniel-
              Israel Can Company Ltd.

            DEP Technology Holdings Ltd.

            DIC and PEC Cable TV Ltd.

            Dutch Can Pack Holding B.V., a subsidiary of Caniel - Israel Can
              Company Ltd.

            Gemini Capital Fund Management Ltd.

            Gemini Israel Fund L.P.

            General Engineers Limited

            Ham-Let U.S.A., Inc., a subsidiary of Ham-Let (Israel-Canada) Ltd.

            H.T. Components U.S.A., Inc., a subsidiary of Ham-Let (Israel-
              Canada) Ltd.

            Israsat International Communications Ltd., a subsidiary of Gilat
              Communications Ltd.

            Kedem Chemicals Ltd., a subsidiary of Tambour Limited

            Level 8 Systems, Inc., a subsidiary of Liraz Systems Ltd.
<PAGE>

            Lev Hamifratz Ltd., a subsidiary of Super-Sol Ltd.

            Mul-T-Lock France S.A.R.L., a subsidiary of Mul-T-Lock Ltd.

            Mul-T-Lock USA, Inc., a subsidiary of Mul-T-Lock Ltd.

            Nitroxid (1993) Production and Marketing Ltd., a subsidiary of
              Maxima Air Separation Center Ltd.

            Rol Profil Ltd., a subsidiary of Klil Industries Ltd.

            Skydata, Inc., a subsidiary of Gilat Satellite Networks Ltd.

            Tambour Paints Ltd., a subsidiary of Tambour Limited

            For the year ended December 31, 1996:

            ASE Advanced Systems Europe B.V., a subsidiary of Liraz Systems Ltd.

            Dutch Can Pack Holding B.V., a subsidiary of Caniel-Israel Can
              Company Ltd.

            Ispah Holdings Ltd.

            Level 8 Systems, Inc., a subsidiary of Liraz Systems Ltd.

            Lev Hamifratz Ltd., a subsidiary of Super-Sol Ltd.

            Maxima-Air Separation Center Ltd.

            Retail Chains Hungary Kereskedelmi Kft., a subsidiary of Super- Sol
              Ltd.

            Sano Dispec Development Ltd.

            Tambour Paints Ltd., a subsidiary of Tambour Limited

            Yaana Systems Ltd., a subsidiary of Liraz Systems Ltd.
<PAGE>

      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


                                    By: /S/ JAMES I. EDELSON
                                        --------------------------------------
DATE: September 3, 1999                 James I. Edelson
                                        Executive Vice President and Secretary

<PAGE>
                        Property and Building Corporation
                            Limited and Subsidiaries

                              Financial Statements
                             As at December 31, 1998
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Financial Statements as at December 31, 1998
--------------------------------------------------------------------------------

Contents

                                                                            Page
                                                                            ----

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                                           11

Annex - Percentage of Holding in Related Companies                          64
<PAGE>

March 11, 1999

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, 1998 and 1997.

-     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, 1998.

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

We did not audit the financial statements of certain subsidiaries, including
those consolidated by the proportionate consolidation method, whose assets
constitute 80% of the total consolidated assets as at December 31, 1998 and
1997, and whose revenues constitute 86%, 72% and 90% of the consolidated
revenues for the years ended on December 31, 1998, 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 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.

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, 1998 and 1997 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, 1998. 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 35C to the financial
statements.

Certified Public Accountants (Isr.)


                                                                             F-2
<PAGE>

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

In terms of shekels of December 1998 (in NIS thousands)

<TABLE>
<CAPTION>
                                              Consolidated             The Company
                                       -------------------   ---------------------
                               Note       1998        1997        1998        1997
                        -----------   --------   ---------   ---------   ---------
<S>                             <C>   <C>        <C>         <C>         <C>
Current Assets
Cash and cash
 equivalents                     2     102,997     168,583       1,220       1,634
Short-term deposits
 and loans                               3,547       1,768
Marketable securities            3      13,223      38,571         576         644
Trade receivables                4      48,814      22,165          31
Other receivables
 and debit balances              5      48,533      22,066      20,987       5,855
Apartments and other
 inventories                     6      74,124       6,693       7,285       1,439
Building projects
 under construction              7     105,780     141,011       4,690       2,861
                                     ---------   ---------   ---------   ---------

                                       397,018     400,857      34,789      12,433
                                     ---------   ---------   ---------   ---------

Land                             8     499,061     434,130       4,072       9,471
                                     ---------   ---------   ---------   ---------

Long-term loans and
 deposits                        9       4,965       3,527       3,237       2,840
                                     ---------   ---------   ---------   ---------
Investments
In investee companies           10     155,024     126,752   1,067,610     971,805
                                     ---------   ---------   ---------   ---------
Fixed Assets
Buildings, land,
 plantations and other               1,640,048   1,444,770      55,656      55,554
Less/- Accumulated
 depreciation                          343,966     339,672      24,338      23,540
                                     ---------   ---------   ---------   ---------

                                     1,296,082   1,105,098      31,318      32,014
                                     ---------   ---------   ---------   ---------

Deferred Charges
 and Other Assets                       24,916      26,311         379         410
                                     ---------   ---------   ---------   ---------

                                     2,377,066   2,096,675   1,141,405   1,028,973
                                     =========   =========   =========   =========
</TABLE>

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


                                                                             F-3
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

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

<TABLE>
<CAPTION>
                                                     Consolidated             The Company
                                            ---------------------   ---------------------
                                     Note        1998        1997        1998        1997
                               ----------   ---------   ---------   ---------   ---------
<S>                                   <C>   <C>         <C>          <C>         <C>
Current Liabilities
Advances from purchasers
 of apartments and
 others, net                           13      19,432       4,345       2,603       1,058
Short-term credit from banks           14      17,500      27,367
Current maturities of long -
term liabilities                               52,727      47,943       2,191       2,609
Suppliers and contractors              15      14,055       9,912
Creditors and credit balances          16     127,733      77,157      19,655      34,486
Deferred taxes                         17                   2,347                      49
Proposed dividend                              31,265      25,100      20,000      18,466
                                            ---------   ---------   ---------   ---------
                                              262,712     194,171      44,449      56,668
                                            ---------   ---------   ---------   ---------
Long-term Liabilities
Convertible debentures                 18     240,469     248,254
Debentures                             18      33,239      38,992
Liabilities to banks and
 provident funds                       18     352,597     223,691
Other long term liabilities            18      60,151      63,601       6,574       8,798
Capital note                           18                              20,000
Deferred taxes                         17      24,546      21,445       1,764       1,294
Liability for employee
 severance benefits, net               19       3,442       2,566
                                            ---------   ---------   ---------   ---------
                                              714,444     598,549      28,338      10,092
                                            ---------   ---------   ---------   ---------

Minority interest                             330,465     330,915
                                            ---------   ---------

Receipt on account of
 option warrants in
 a subsidiary                                  10,827      10,827
                                            ---------   ---------

Shareholders' Equity                        1,068,618     962,213   1,067,610     962,213
                                            ---------   ---------   ---------   ---------

Contingent Liabilities
 and Commitments                       20

                                            2,377,066   2,096,675   1,141,405   1,028,973
                                            =========   =========   =========   =========
</TABLE>

----------------------------------
Dov Tadmor - Chairman of the Board

----------------------------------
Abraham Attias - Managing Director

March 11, 1999


                                                                             F-4
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

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

In terms of shekels of  December 1998 (in NIS thousands)

<TABLE>
<CAPTION>
                                                                       Consolidated                  The Company
                                                                -----------------------------  ----------------------------
                                                        Note         1998      1997      1996     1998      1997       1996
                                                     -------    ---------  --------  --------  --------  --------  --------
<S>                                                       <C>     <C>       <C>       <C>        <C>       <C>      <C>
Income
Rentals and warehousing                                           156,481   149,130   139,941     9,865     8,520     8,328
From construction and other sources                       21      334,765   292,156   249,906    50,563    57,746
The Company's equity in the net earnings of investee
companies                                                 22        6,582     7,115    13,788   111,750    65,356    69,105
Gain on sale of investments and fixed assets              23       70,715    10,985     3,087        15       655        81
Income from securities, financing and others              24       12,682    12,796     7,519     1,955     2,226     2,696
                                                                  -------   -------   -------   -------   -------   -------
                                                                  581,225   472,182   414,241   174,148   134,503    80,210
                                                                  -------   -------   -------   -------   -------   -------
Costs and Expenses
Construction and other costs                              25      242,800   212,620   175,549    33,327    41,747
Administrative and general                                26       38,505    34,829    33,780     8,230     7,828     7,423
Selling and marketing                                     27        5,381     5,426     4,146       266       953
Property maintenance (excluding depreciation)                      12,970    12,237    11,446     1,057       847       883
Depreciation and amortization                             28       27,875    24,454    21,573     1,059     1,050     1,371
Property taxes on land                                              8,390     9,450     8,239       540       923     1,049
Financing                                                 29       26,320    26,150    17,901     1,287     1,177     3,393
                                                                  -------   -------   -------   -------   -------   -------
                                                                  362,241   325,166   272,634    45,766    54,519    14,119
                                                                  -------   -------   -------   -------   -------   -------

Earnings before taxes on income                                   218,984   147,016   141,607   128,382    79,984    66,091
Taxes on income                                           30       64,877    47,285    46,316     6,276     6,561    (1,007)
                                                                  -------   -------   -------   -------   -------   -------
Earnings after taxation                                           154,107    99,731    95,291   122,106    73,423    67,098

Less/- Minority interest in earnings                               32,001    26,308    28,193
                                                                  -------   -------   -------   -------   -------   -------

Net earnings for the year                                         122,106    73,423    67,098   122,106    73,423    67,098
                                                                  =======   =======   =======   =======   =======   =======

Earnings Per Share
Net earnings per share of a par
  value of NIS 1.00 (in NIS)                                        29.46     17.81     17.24     29.46     17.81     17.24
                                                                  =======   =======   =======   =======   =======   =======
</TABLE>

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


                                                                             F-5
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

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

In terms of shekels of December 1998 (in NIS thousands)

<TABLE>
<CAPTION>
                                       Share        Capital        Premium    Capitalized       Retained           Total
                                     capital        surplus      on shares     surplus in       earnings
                                                                             subsidiaries
                                     -------        -------      ---------   ------------       --------         -------
<S>                                  <C>            <C>            <C>             <C>           <C>             <C>
Balance as at January 1,
 1996                                193,135        155,734*                       28,192        383,974         761,035

Net earnings for the year                                                                         67,098          67,098
Issue of shares                          669                        85,594                                        86,263
Inflationary erosion of dividend
 declared in the previous year                                                                       644             644
Proposed dividend - 280%                                                                         (13,365)        (13,365)
                                     -------        -------         ------         ------        -------       ---------
Balance as at December 31,
 1996                                193,804        155,734         85,594         28,192        438,351         901,675

Net earnings for the year                                                                         73,423          73,423
Exercise of share options                 29                         4,451                                         4,480
Tax benefit in respect of the
 exercise of share purchase
 options by employees                                   666                                                          666
Inflationary erosion of dividend
 declared in the previous                                                                            435             435
Proposed dividend - 412%                                                                         (18,466)        (18,466)
                                     -------        -------         ------         ------        -------       ---------
Balance as at December 31,
 1997                                193,833        156,400         90,045         28,192        493,743         962,213

Net earnings for the year                                                                        122,106         122,106
Exercise of share options                 15                         3,716                                         3,731
Tax benefit in respect of the
 exercise of share purchase
 options by employees                                   306                                                          306
Inflationary erosion of dividend
 declared in the previous year                                                                       262             262
Proposed dividend - 482.7%                                                                       (20,000)        (20,000)
                                     -------        -------         ------         ------        -------       ---------
Balance as at December 31,
 1998                                193,848        156,706         93,761         28,192        596,111       1,068,618
                                     =======        =======         ======         ======        =======       =========
</TABLE>

*     Capital surplus created until December 31, 1991.

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


                                                                             F-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 1998 (in NIS thousands)

<TABLE>
<CAPTION>
                                                                  Consolidated                         The Company
                                                        --------------------------------    --------------------------------
                                                          1998        1997        1996        1998        1997        1996
                                                        --------    --------    --------    --------    --------    --------
<S>                                                      <C>          <C>         <C>        <C>          <C>         <C>
Cash flows generated by operating activities
Net earnings                                             122,106      73,423      67,098     122,106      73,423      67,098
Adjustments to reconcile net earnings to
 net cash flows generated by operating
 activities (Annex):                                      (7,763)     46,987      62,912    (102,377)   (104,823)    (27,275)
                                                        --------    --------    --------    --------    --------    --------
Net cash inflow (outflow) generated by operating
 activities                                              114,343     120,410     130,010      19,729     (31,400)     39,823
                                                        --------    --------    --------    --------    --------    --------
Cash flows generating by investing activities
Proceeds from realization of investment in
 investee company                                                     29,800
Payments on account of investments                       (26,274)                             (1,020)
Investments in investee companies                        (32,930)     (2,938)    (40,368)    (27,697)     (4,765)   (101,949)
Dividend received from investee companies                  5,772       8,534       8,852      44,662      18,242      13,861
Acquisition of the interest of another
 shareholder, in a formerly
 proportionately consolidated company (Annex B)          (10,213)
Repayment of another shareholder's
 portion of shareholders' loan
 in a formerly proportionately consolidated company      (17,505)
Purchase of marketable securities                         (7,281)    (42,255)   (654,850)        (39)        (37)        (11)
Proceeds from sale of marketable securities               35,755      44,863     660,926          95          99         130
Acquisition and development of land                      (87,093)    (38,948)   (132,311)     (2,408)     (2,698)     (5,330)
Purchase and construction of fixed assets               (188,842)   (163,788)   (136,760)       (368)     (1,090)       (168)
Collections of credit relating to sale of real estate                  1,669       1,862
Proceeds from sale of fixed assets and real estate        60,891       1,182       2,199          51                      34
Repayment of long-term deposits and loans                  1,351       2,000         790         912
Granting of long-term loans                               (4,801)     (3,145)                 (2,513)     (2,308)     (1,231)
Repayment (Granting) of short-term deposits               (1,779)     16,546     (17,927)
Repayment of loans to subsidiaries                                                                        11,661         857
                                                        --------    --------    --------    --------    --------    --------
Net cash inflow (outflow) generated by investing
 activities                                             (272,949)   (146,480)   (307,587)     11,675      19,104     (93,807)
                                                        --------    --------    --------    --------    --------    --------
</TABLE>


                                                                             F-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 1998 in NIS thousands)

<TABLE>
<CAPTION>
                                                                        Consolidated                         The Company
                                                              --------------------------------    --------------------------------
                                                                  1998        1997        1996        1998        1997        1996
                                                              --------    --------    --------    --------    --------    --------
<S>                                                           <C>          <C>         <C>        <C>          <C>         <C>
Cash flows generated by financing activities
Dividend paid
- by the parent company                                        (18,204)    (12,930)    (10,280)    (18,204)    (12,930)    (10,280)
- to outside shareholders of subsidiary companies               (6,539)     (5,384)     (4,915)
Payment of debentures                                          (13,562)     (9,716)    (14,370)
Payment of long-term loans                                     (31,450)    (67,734)     (3,492)     (2,191)       (405)       (320)
Receipt of long-term loans                                     167,872      33,733     148,245
Receipt of capital note from subsidiary                                                             20,000
Repayment (receipt) of long-term loan from subsidiary, net                                                       1,550     (21,818)
Receipt (repayment) of credit from subsidiary company                                              (34,748)     20,389
Receipt (repayment) of short-term bank credit                   (9,867)     13,129     (16,949)       (406)       (405)        405
Payments to outside shareholders of subsidiary                    (125)        (79)       (495)
Repayments of credit in respect of real estate acquisition        (612)    (14,511)    (36,537)
Securities issue by a subsidiary                                 1,776     190,253      69,540
Share issue by the Company                                       3,731       4,481      86,262       3,731       4,481      86,263
                                                               -------     -------     -------     -------     -------     -------

Net cash inflow (outflow) generated by financing activities     93,020     131,242     217,009     (31,818)     12,680      54,250
                                                               -------     -------     -------     -------     -------     -------

Net increase (decrease) in cash and cash equivalents           (65,586)    105,172      39,432        (414)        384         266
Cash and cash equivalents at beginning of year                 168,583      63,411      23,979       1,634       1,250         984
                                                               -------     -------     -------     -------     -------     -------

Cash and cash equivalents at end of year                       102,997     168,583      63,411       1,220       1,634       1,250
                                                               =======     =======     =======     =======     =======     =======
</TABLE>

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


                                                                             F-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 1998 (in NIS thousands)

<TABLE>
<CAPTION>
                                                                        Consolidated                         The Company
                                                              --------------------------------    --------------------------------
                                                                  1998        1997        1996        1998        1997        1996
                                                              --------    --------    --------    --------    --------    --------
<S>                                                           <C>          <C>         <C>        <C>          <C>         <C>
Annex A

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

Transactions not involving cash flows:
The Company's equity in the net
 earnings of investee companies                               (6,582)     (7,115)    (13,788)   (111,750)    (65,356)    (69,105)
Outside shareholders' interest in earnings                    32,001      26,308      28,193
Depreciation and amortization                                 28,706      25,188      22,178       1,059       1,050       1,372
Net changes in deferred taxes                                (11,282)    (19,216)      4,502         (40)      1,671      (1,793)
Increase (decrease) in liability for
 employee severance benefits                                     876         (28)        (93)         (8)         (1)          1
Decrease (increase) in value of securities                    (3,126)     (3,463)     (5,414)         12         (27)        (26)
Income from realization of investments
 and issue of capital by investee companies                              (11,028)        (58)                   (655)        (58)
Capital losses (gains) on sale of fixed assets
 and real estate                                             (68,055)         43      (3,029)        (15)                    (23)
Inflationary erosion of long-term deposits and loans, net       (380)      6,433       1,844         328         445         123
Amortization of debenture discount                             1,057       1,149         904

Changes in current assets and liabilities:
(Increase) decrease in trade receivables                     (26,649)     23,656     (16,378)        (31)
(Increase) decrease in other receivables                       3,415       2,374      20,211       1,502      (1,347)     (1,541)
(Increase) decrease in construction costs, net                 7,787        (475)     22,052       1,677      (4,528)      7,368
Increase (decrease) in suppliers and subcontractors            4,143      (1,186)      3,050
Increase (decrease) in other payables                         30,326       4,347      (1,262)      4,889     (36,075)     33,325
                                                            --------    --------    --------    --------    --------    --------

Total adjustments                                             (7,763)     46,987      62,912    (102,377)   (104,823)    (27,275)
                                                            ========    ========    ========    ========    ========    ========

Significant non-cash transactions:
Purchase of fixed assets on credit                                           328      11,444
                                                                        --------    --------
Purchase of real estate on credit                             11,570
                                                            --------
Sale of fixed assets on credit                                18,725                   1,669
                                                            --------                --------
</TABLE>


                                                                             F-9
<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 1998 (in NIS thousands)

                                                                    Consolidated
                                                                    ------------
                                                                            1998
                                                                    ------------
Annex B

Acquisition of the interest of another
 shareholder, in a formerly
 proportionately consolidated company

Assets and liabilities of the company
 at the date of acquisition :
Working capital (cash and cash equivalents)                                  30
Fixed assets, net                                                        22,836
Long term liabilities                                                   (17,505)
Difference created due to acquisition                                     4,852
                                                                    ------------

                                                                         10,213
                                                                    ============


                                                                            F-10
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

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, in
            accordance with Regulation 8 of the Securities Regulations
            (Preparation of Annual Financial Statements), 1993)

      B.    Uncertainty Due to the Year 2000 Issue

      The Year 2000 Issue arises because many computerized systems use two
      digits rather than four to identify a year. Date-sensitive systems may
      recognize the year 2000 as 1900 or some other date, resulting in errors
      when information using year 2000 dates is processed. Similar problems may
      also occur in systems that use the digits "99" in a date field as
      indication of something other than the year 1999. The effects of the Year
      2000 Issue may be experienced before, on, or after January 1, 2000, and if
      not addressed, the impact on operations and financial reporting may range
      from minor errors to significant systems failure which could affect an
      entity's ability to conduct regular business operations. It is not
      possible to be certain that all aspects of the Year 2000 issue affecting
      the Company including those relating to the remediation efforts of
      customers, suppliers or other third parties, will be fully resolved.


                                                                            F-11
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

      C.    Financial statements in adjusted values

      1.    The Company prepares 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 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 shekels of December
            1998.

      D.    Use of estimates

      The preparation of financial statements in accordance with generally
      accepted accounting principles requires management to use estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities as at the date of the
      financial statements and the reported amount of revenues and expenses
      during the reporting period. Actual results may differ from such
      estimates.

      E.    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 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 adjustment of related balance sheet
                        items.


                                                                            F-12
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

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

      E.    Principles of adjustment (cont'd)

      2.    Statement of earnings (cont'd)

                  (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 outside
                        shareholders' share in the results of operation of
                        subsidiaries was based on the adjusted financial
                        statements of such companies.

                  (4)   Net financing items reflect revenue and expenses in real
                        terms, the inflationary erosion of monetary items during
                        the year, and profits and loss from realization and
                        revaluation of marketable securities.

            (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. Amounts payable (or
                  refundable) have been included unadjusted. Current taxes
                  include, therefore, the expense derived from inflationary
                  erosion of the value of payments made on account from time of
                  payment to year end.

                  Deferred taxes - see Note 1F(12) 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 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 guidelines based on Section 36A
            of the Securities Law - 1968.


                                                                            F-13
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

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

      E.    Principles of adjustment (cont'd)

      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 current year end.

      F.    Accounting policies

      1.    Consolidated financial statements

            (a)   The consolidated financial statements include the controlled
                  subsidiaries. Companies under joint control are consolidated
                  in the financial statements using the proportionate
                  consolidation method.

            (b)   The list of companies whose reports were included in the
                  consolidated reports, the percentage of voting rights, and the
                  percentage of shareholding granting rights to profits, is
                  presented in the annex to the financial reports. In addition,
                  affiliated companies not consolidated are also presented in
                  the annex to the financial reports.

            (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 uniform Group accounting principles.

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

            (e)   (1)   At the time of acquisition, the excess cost of
                        investment over net asset value is recorded as goodwill.

                  (2)   Excess cost attributed to assets and liabilities is
                        recorded in the appropriate accounts on the balance
                        sheet.

                  (3)   Excess of adjusted net asset value over cost of
                        investment is initially attributed to intangible assets,
                        any excess of adjusted net asset value over cost of the
                        investment not attributed to intangible assets is
                        attributed to nonmonetary assets, in accordance with the
                        company's interest in such assets.

            (f)   Goodwill disclosed on the consolidated balance sheet under the
                  heading "Deferred charges and other assets" is amortized
                  equally, on an annual basis, over a 10 year period.


                                                                            F-14
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

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

      F.    Accounting policies (cont'd)

      1.    Consolidated financial statements (cont'd)

            (g.)  Real estate properties of the Company and its subsidiaries
                  that are registered 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.

      4.    Inventory

            (a)   The inventory of apartments and work in process are recorded
                  at cost (cost of land, sub-contractors and other expenses) not
                  to exceed the market value of the built apartments.

            (b)   Inventory of supplies, air conditioning and others 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 under 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.


                                                                            F-15
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

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

      F.    Accounting policies (cont'd)

      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 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 10% per year.

      7.    Provision for doubtful debts

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

      8.    Fixed assets

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

            (b)   The financing cost incurred as a result of loans and credit,
                  for the purchase or development of fixed assets and other
                  acquisition/development costs were added to the cost of the
                  asset, up until the date of use.

      9.    Other assets - Initial difference which cannot be allocated to
            assets - see Note 1F(6)(c).

      10.   Deferred charges

            (a)   Expenses relating to debenture issues are written off against
                  income over debenture lives in proportion to their outstanding
                  balance.

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


                                                                            F-16
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

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

      F.    Accounting policies (cont'd)

      11.   Convertible debentures

            (a)   Debentures, the conversion of which is not, as at balance
                  sheet date, expected according to guidelines set by the
                  Institute of Certified Public Accountants in Israel, 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 received at the date of the issue and the stated value
                  of the debentures) is amortized using the implicit interest
                  method over the period of the debentures in proportion to
                  their outstanding balance.

      12.   Deferred taxes

            Deferred taxes in the adjusted financial statements reflect mainly
            the following areas of timing differences of items between their
            financial statement inclusion and 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.

            (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.


                                                                            F-17
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

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

      F.    Accounting policies (cont'd)

      13.   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 activities relate to installation of air
                  conditioning systems as an executing contractor, recognizes
                  income from long-term projects by the "percentage of
                  completion method".

      14.   Year 2000 compliance

            The costs to prepare and convert those years belonging to the
            existing programs of the company, to be able to differentiate the
            20th century and those belonging to the 21st century, are recorded
            as current expenses at the time they are incurred.

      15.   Foreign currency and linkage

            Assets and liabilities that are linked to 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.


                                                                            F-18
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

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

      F.    Accounting policies (cont'd)

      15.   Foreign currency and linkage (cont'd)

            Data concerning consumer price index and foreign currency rates:

<TABLE>
<CAPTION>
                                                                                     % of change
                     December 31   December 31   December 31     -------------------------------
                            1998          1997          1996          1998       1997       1996
                     -----------   -----------   -----------     ---------   --------   --------
<S>                        <C>           <C>           <C>            <C>         <C>       <C>
Consumer price
 index, in points          166.3         153.1         143.1           8.6        7.0       10.6

Consumer price
 index, (latest
 known index)
 in points                 166.2         153.6         142.0           8.2        8.2       11.0

Exchange
 rate of the
 U.S. dollar,
 in NIS                     4.16         3.536         3.251          17.6        8.8        3.7
</TABLE>

      16.   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.


                                                                            F-19
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 2 - Cash and Cash Equivalents

<TABLE>
<CAPTION>
                                              Consolidated                 The Company
                                 -------------------------   -------------------------
                                 December 31   December 31   December 31   December 31
                                        1998          1997          1998          1997
                                 -----------   -----------   -----------   -----------
<S>                                  <C>           <C>             <C>           <C>
Short-term deposits with banks       102,709       168,268         1,208         1,628
Cash at bank                             288           315            12             6
                                 -----------   -----------   -----------   -----------

                                     102,997       168,583         1,220         1,634
                                 ===========   ===========   ===========   ===========
</TABLE>

         The cash and deposits are stated in Israeli shekels.

Note 3 - Marketable Securities

<TABLE>
<CAPTION>
                                              Consolidated                 The Company
                                 -------------------------   -------------------------
                                 December 31   December 31   December 31   December 31
                                        1998          1997          1998          1997
                                 -----------   -----------   -----------   -----------
<S>                                  <C>           <C>             <C>           <C>

Government loans                       7,372        22,021
Mutual fund certificates               5,379        11,014
Debentures issued by a
 subsidiary*                                                         576           644
Other debentures                         330           805
Shares                                   142         1,621
Convertible securities                               3,110
                                 -----------   -----------   -----------   -----------

                                      13,223        38,571           576           644
                                 ===========   ===========   ===========   ===========
</TABLE>

*     See Note 20C(1)


                                                                            F-20
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 4 - Trade Receivables

      A.    Composition:

<TABLE>
<CAPTION>
                                                          Consolidated       The Company
                                         -----------------------------       -----------
                                         December 31       December 31       December 31
                                                1998              1997              1998
                                         -----------       -----------       -----------
<S>                                           <C>                <C>                  <C>
Purchasers of apartments and shops            30,101             4,778                31
Rentals and warehousing*                      10,292            11,238
Air conditioning and others*                   4,976             4,097
Notes receivable                               3,445             2,052
                                         -----------       -----------       -----------

                                              48,814            22,165                31
                                         ===========       ===========       ===========

*   After deduction of provision for
    doubtful debts                             1,215             1,123
                                         ===========       ===========
</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
                                             1998               1997             1998              1997
                                      -----------        -----------      -----------       -----------
<S>                                        <C>                <C>               <C>               <C>
Accrued income                              5,122             6,487                                 235
Purchasers of fixed assets*                18,969
Deferred taxes                             15,906             5,537             3,845             3,384
Deposits and prepaid expenses               1,246             1,030                12                 9
Advances to Tax Authorities
 less provisions                            1,267             3,037               442
Current maturities of long-term
 loans to employees and
 deposits                                   2,965             1,333             1,620               789
Other debtors                               1,359             3,642                44             1,438
Value Added Tax authorities                 1,699             1,000
Subsidiary - current account**                                                 15,024
                                      -----------        -----------      -----------       -----------

                                           48,533            22,066            20,987             5,855
                                      ===========        ===========      ===========       ===========
</TABLE>

*     Balance linked mainly to U.S. dollar.

**    Carries annual interest rate of 2%.


                                                                            F-21
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 6 - Apartments and Other Inventories

<TABLE>
<CAPTION>
                                                        Consolidated                        The Company
                                      ------------------------------      -----------------------------
                                      December 31        December 31      December 31       December 31
                                             1998               1997             1998              1997
                                      -----------        -----------      -----------       -----------
<S>                                        <C>                <C>               <C>               <C>
Apartments in completed building           72,628             5,777             7,285             1,439
Air-conditioning equipment and
 other                                      1,496               916
                                           ------             -----             -----             -----

                                           74,124             6,693             7,285             1,439
                                           ======             =====             =====             =====
</TABLE>

Note 7 - Building Projects Under Construction

<TABLE>
<CAPTION>
                                               Consolidated                        The Company
                             ------------------------------      -----------------------------
                             December 31        December 31      December 31       December 31
                                    1998              1997              1998              1997
                             -----------        -----------      -----------       -----------
<S>                              <C>                <C>                <C>                <C>
Land                              60,004             86,030            4,306              3,147
Construction work                108,332            153,737            1,237              3,331
                                 -------            -------            -----              -----
                                 168,336            239,767            5,543              6,478
Less - Advances from
 apartment purchasers             62,556             98,756              853              3,617
                                 -------            -------            -----              -----

                                 105,780            141,011            4,690              2,861
                                 =======            =======            =====              =====
</TABLE>


                                                                            F-22
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 8 - Land

      A.    Composition:

<TABLE>
<CAPTION>
                                                Consolidated                        The Company
                              ------------------------------      -----------------------------
                              December 31        December 31      December 31       December 31
                                     1998               1997             1998              1997
                              -----------        -----------      -----------       -----------
<S>                               <C>                <C>                <C>               <C>
Freehold land *                   250,809            201,632            4,072             9,471
Leasehold land                    237,519            221,320
Stores in completed
 buildings and other
 installations                      5,623              5,849
Parking lot and sports
 center                             3,450              3,477
Expenses relating to
 future stages of
 construction                       1,660              1,852

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

                                  499,061            434,130            4,072             9,471
                              ===========        ===========      ===========       ===========
</TABLE>

      *     Including NIS 29.2 million in rights to land which have not yet been
            registered in the name of the subsidiary (the subsidiary did
            register a caveat).

            Land at a value of NIS 2.2 million is in an area in which the land
            ownership rights are in the process of being finalized. Once the
            process is completed the rights will be registered in the name of
            the Company. Land at a value of NIS 25 million will be registered in
            the name of the company upon completion of the payments on account.

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

      C.    Leasehold rights in land:

                                                        The lease           Cost
                                                       expires in
                                                       ----------     ----------

Capitalized leasehold                                        2048        236,573
Uncapitalized leasehold                                      2040           *946
                                                                      ----------

                                                                         237,519
                                                                      ==========

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


                                                                            F-23
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 9 - Long-term Loans and Deposits

      A.    Composition:

      (1)   In the consolidated balance sheet:

<TABLE>
<CAPTION>
                          Interest                                         December 31
                              rate          December 31, 1998                     1997
                          --------  -------------------------------------  -----------
                                       Total         Current      Balance      Balance
                                 %                maturities
                          --------  -----------  -----------  -----------  -----------
<S>                              <C>      <C>          <C>          <C>          <C>
      Loans to
       employees for
       issue of stock and
       realizing
       options(C)                2        7,892        2,955        4,937        3,493
      Deposits with
       banks -
      For the granting
       of loans to
       apartment
       purchasers                4           38           10           28           34
                                          -----        -----        -----        -----
                                          7,930        2,965        4,965        3,527
                                          =====        =====        =====        =====

      (2) In the company balance sheet:

      Loans to
       employees for
       issue of stock and
       realizing options                  4,857        1,620        3,237        2,840
                                          =====        =====        =====        =====
</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.


                                                                            F-24
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 9 - Long-term Loans and Deposits (cont'd)

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

<TABLE>
<CAPTION>
                                              Consolidated                 The Company
                                 -------------------------   -------------------------
                                 December 31   December 31   December 31   December 31
                                        1998          1997          1998          1997
                                 -----------   -----------   -----------   -----------
<S>                                    <C>           <C>           <C>           <C>
Within 12 months - current
 maturities                            2,965         1,333         1,620           789
                                       =====         =====         =====           ===

During second year                     2,482         1,162         1,620           789
During third year                      2,483         1,103         1,617           789
No date of redemption but no
 later than 2001                                     1,262                       1,262
                                       -----         -----         -----         -----
                                       4,965         3,527         3,237         2,840
                                       =====         =====         =====         =====
</TABLE>

      E.    Loans at a value of NIS 4,938 thousand are eligible for early
            repayment.


                                                                            F-25
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 10 - Investments in Investee Companies

      A.    Consolidated balance sheet

<TABLE>
<CAPTION>
                                                                                   December 31
                                                 December 31, 1998                        1997
                                       ----------------------------------------    -----------
                                       Opening        Changes             Total          Total
                                       balance
                                       -------        -------          --------    -----------
<S>                                    <C>            <C>              <C>             <C>
1. Composition:

Affiliated companies

Shares at cost, include -
Adjusted net asset value at the
 date of acquisition (a)               101,650                         101,650         101,650

Initial difference, net                  3,488                           3,488           3,488
                                       -------                         -------         -------
                                       105,138                         105,138         105,138

Add -
The Company's share in the net
 post-acquisition profits               21,688           3,351          25,039          21,688

Amortization of initial
 difference                             (1,952)         (1,353)         (3,305)         (1,952)
                                       -------         -------         -------         -------

Book value of shares (b)               124,874           1,998         126,872         124,874
                                       -------         -------         -------         -------

Payment in respect of initial
 difference of subsidiary
 company (c)                             1,447                           1,447           1,447
Payment on account of share
 acquisition (d)                                        26,274          26,274
Other company                              431                             431             431
                                       -------         -------         -------         -------

                                       126,752          28,272         155,024         126,752
                                       =======         =======         =======         =======
</TABLE>

      (a)   The investment is presented net of dividends distributed by an
            affiliated company out of pre-acquisition earnings, amounting to NIS
            5,256 thousand.

      (b)   Includes quoted shares whose adjusted equity value at balance sheet
            date is NIS 112,366 thousand (December 31, 1997 - NIS 86,462
            thousand). The market value of these shares at balance sheet date is
            NIS 159,238 thousand (December 31, 1997 - NIS 112,364 thousand).

      (c)   Payment on account of options in the subsidiary company (i.e.
            payment in respect of initial difference) amounted to NIS 1,447
            thousand. The market value of the options as at December 31, 1998 is
            NIS 363 thousand.

      (d)   Payments on account of share acquisitions - see Note 20C(7).


                                                                            F-26
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

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, 1998 and 1997:

<TABLE>
<CAPTION>
                                                           December 31     December 31
                                                                  1998            1997
                                                           -----------     -----------
<S>                                                             <C>             <C>
      (a)   Balance sheet data

      Assets:
      Current assets                                               265             429
      Fixed assets                                              52,103          59,613
                                                           -----------     -----------

                                                                52,368          60,042
                                                           ===========     ===========

      Liabilities and shareholders' equity:
      Current liabilities                                        5,870           4,341
      Long-term liabilities                                     13,409
      Shareholders' equity                                      33,089          55,701
                                                           -----------     -----------

                                                                52,368          60,042
                                                           ===========     ===========
</TABLE>

      (b)   Statements of earnings

<TABLE>
<CAPTION>
                                             December 31    December 31    December 31
                                                    1998           1997           1996
                                             -----------    -----------    -----------
<S>                                                <C>            <C>            <C>
      Income:                                      3,706          3,842          3,229
                                             -----------    -----------    -----------
      Costs and expenses:
      Property maintenance                           355            482            413
      Administrative and general                     423            446            375
      Financing, net                                 370             81
      Depreciation                                   815            897            863
                                             -----------    -----------    -----------

                                                   1,963          1,906          1,651
                                             -----------    -----------    -----------

      Earnings before taxes                        1,743          1,936          1,578

      Taxes on income                                628            680            570

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

                                                   1,115          1,256          1,008
                                             ===========    ===========    ===========
</TABLE>


                                                                            F-27
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

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

      B.    Company balance sheet

<TABLE>
<CAPTION>
                                Subsidiaries        Affiliated       December 31       December 31
                                                     companies              1998              1997
                                                                            ----              ----
                                                                           Total             Total
                                ------------        ----------       -----------       -----------
<S>                                <C>                  <C>            <C>                 <C>
Shares at cost, include -
Adjusted net asset value at
 date of acquisition                 365,526                             365,526           342,755
Initial difference, net (2)           12,722            19,631            32,353            27,427
                                   ---------            ------         ---------           -------

                                     378,248            19,361           397,879           370,182
Add -
The Company's share in net
 post-acquisition profits            688,625             3,730           672,355           603,448

Amortization of initial
 difference                           (1,576)           (2,499)           (4,075)           (2,256)
                                   ---------            ------         ---------           -------

Book value of shares (1)           1,045,297            20,862         1,066,159           971,374

Loan (3)                               1,020                               1,020

Other company                            431                                 431               431
                                   ---------            ------         ---------           -------

                                   1,046,748            20,862         1,067,610           971,805
                                   =========            ======         =========           =======
</TABLE>

      (1)   Payment on account of options in the subsidiary company (i.e.
            payment in respect of initial difference) amounted to NIS 1,447
            thousand. The market value of the options as at December 31, 1998 is
            NIS 363 thousand.

      (2)   Includes quoted shares whose adjusted equity value at balance sheet
            date is NIS 776,284 thousand (December 31, 1997 - NIS 843,214
            thousand). The market value of these shares at balance sheet date is
            NIS 1,105,420 thousand (December 31, 1997 - NIS 1,072,097 thousand).

      (3)   Payment on account of investment in Carmelton Group Ltd.- See Note
            20C(6).


                                                                            F-28
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 11 - Fixed Assets

      A.    Consolidated balance sheet:

<TABLE>
<CAPTION>
                                   Leased          Land     Buildings  Plantations     Vehicles     Machinery
                               commercial      intended         under          and                        and
                                buildings       for the  construction   irrigation                  equipment
                               and office  construction                    network
                                 premises  of buildings                         (3)
                                      (1)        (1)(2)
                               ----------  ------------  ------------  ------------    ---------     ---------
<S>                               <C>           <C>           <C>             <C>          <C>           <C>
Cost
Balance at beginning of year      995,590       264,658       150,918         8,429        6,080         7,870
Additions                         103,713        32,200        90,216                      1,791             5
Transfers                         102,111       (15,906)      (86,205)
Disposals                         (31,938)                                                (1,040)         (236)
                               ----------    ----------    ----------    ----------   ----------    ----------

Balance at end of year          1,169,476       280,952       154,929         8,429        6,831         7,639
                               ----------    ----------    ----------    ----------   ----------    ----------

Accumulated depreciation
Balance at beginning of year      315,300                                     7,432        2,644         7,091
Depreciation                       23,874                                                    888           272
Disposals                         (20,786)                                                  (631)         (236)
                               ----------                                ----------   ----------    ----------

Balance at end of year            318,388                                     7,432        2,901         7,127
                               ----------                                ----------   ----------    ----------

Depreciated cost
 as at December 31, 1998          851,088       280,952       154,929           997        3,930           512
                               ==========    ==========    ==========    ==========   ==========    ==========

Depreciated cost
 as at December 31, 1997          680,290       264,658       150,918           997        3,436           779
                               ==========    ==========    ==========    ==========   ==========    ==========

<CAPTION>
                                    Other         Total         Total
                                   assets


                                             December 31   December 31
                                                    1998          1997
                                    ------   -----------   -----------
<S>                                 <C>        <C>           <C>
Cost
Balance at beginning of year        11,225     1,444,770     1,268,085
Additions                              567       228,492       177,830
Transfers
Disposals                                        (33,214)       (1,145)
                                ----------    ----------    ----------

Balance at end of year              11,792     1,640,048     1,444,770
                                ----------    ----------    ----------

Accumulated depreciation
Balance at beginning of year         7,205       339,672       317,641
Depreciation                           913        25,947        22,760
Disposals                                        (21,653)         (729)
                                ----------    ----------    ----------

Balance at end of year               8,118       343,966       339,642
                                ----------    ----------    ----------

Depreciated cost
 as at December 31, 1998             3,674     1,296,082
                                ==========    ==========

Depreciated cost
 as at December 31, 1997             4,020                   1,105,098
                                ==========                  ==========
</TABLE>


                                                                            F-29
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 11 - Fixed Assets (cont'd)

      A.    Consolidated balance sheet: (cont'd)

      (1)   Including rights in land aggregating NIS 459,118 thousand. The land
            is mainly registered in the names of the Company and the
            subsidiaries. Part of the land, of an adjusted cost of NIS 234,404
            thousand, is freehold land of the Company and the subsidiaries.
            Another part, of an adjusted cost of NIS 234,717 thousand, is
            leasehold land, leased by subsidiaries (of which NIS 8,373 is an
            uncapitalized 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 18,544 thousand 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)   The plantations are on land area totaling 334 dunams (freehold land
            - 97 dunams, leasehold land - 237 dunams, leased until the year 2062
            and thereafter).

      (4)   The cost of the fixed assets includes financing costs of NIS 6,593
            thousand (December 31, 1997 - NIS 4,111 thousand).


                                                                            F-30
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 11 - Fixed Assets (cont'd)

B.       Company balance sheet

<TABLE>
<CAPTION>
                                       Leased        Buildings         Vehicles           Other            Total              Total
                                     building            under                           assets
                                   and office     construction
                                     premises
                                                                                                       December 31       December 31
                                          (1)              (2)                                                1998              1997
                                   ----------     ------------         --------          --------     ------------        ----------
<S>                                    <C>              <C>                 <C>               <C>           <C>               <C>
Cost

Balance at beginning of year           38,232           15,490              841               991           55,554            54,465
Additions                                                                                                                      1,089
Transfers                              15,490          (15,490)             290                78              368
Disposals                                                                  (266)                              (266)
                                      -------          -------          -------           -------          -------           -------

Balance at end of year                 53,722                               865             1,069           55,656            55,554
                                      -------          -------          -------           -------          -------           -------

Accumulated depreciation

Balance at beginning of year           22,611                               568               361           23,540            22,519
Depreciation                              781                               113               133            1,027             1,021
Disposals                                                                  (229)                              (229)
                                      -------                           -------           -------          -------           -------

Balance at end of year                 23,392                               452               494           24,338            23,540
                                      -------                           -------           -------          -------           -------
Depreciated cost as at
 December 31, 1998                     30,330                               413               575           31,318
                                      =======                           =======           =======          =======
Depreciated cost as at
 December 31, 1997                     15,620           15,490              274               630                             32,014
                                      =======          =======          =======           =======                            =======
</TABLE>


(1)   Includes rights in land amounting to NIS 24,605 thousand.

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


                                                                            F-31
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 11 - Fixed Assets (cont'd)

C.    Rates of depreciation                                                  %
                                                                           -----
      Buildings                                                              4-2
      Plantations and irrigation plants                                    20-15
      Vehicles                                                                15
      Machinery and equipment                                              20-10
      Other assets                                                          33-6

Note 12 - Deferred Charges and Other Assets

<TABLE>
<CAPTION>
                                           Cost  Accumulated
                                                 amortization                 Amortized cost
                                    -----------   -----------   -----------      -----------
                                    December 31   December 31   December 31      December 31
                                           1998          1998          1998             1997
                                    -----------   -----------   -----------      -----------
<S>                                      <C>           <C>            <C>             <C>
A.    Consolidated balance sheet

Deferred charges -
Capital raising expenses                 19,418        10,325         9,093           11,375
Deferred taxes in connection
 with unrealized profits from
 real estate transactions                 2,970         1,487         1,483            1,635
                                         ------        ------        ------           ------

Deferred charges                         22,388        11,812        10,576           13,010
                                         ------        ------        ------           ------

Other assets - initial difference         6,280         1,570         4,710            5,338
Deferred taxes for timing
 differences                              9,630                       9,630            7,963
                                         ------        ------        ------           ------

                                         15,910         1,570        14,340           13,301
                                         ------        ------        ------           ------

                                         38,298        13,382        24,916           26,311
                                         ======        ======        ======           ======

B.    The Company balance sheet

Deferred charges -
Taxes in connection with
 unrealized profits from
 real estate transactions                   734           355           379              410
                                         ======        ======        ======           ======
</TABLE>


                                                                            F-32
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 13 - Advances from Purchasers of Apartments and Others, Net

<TABLE>
<CAPTION>
                                              Consolidated                 The Company
                                 -------------------------   -------------------------
                                 December 31   December 31   December 31   December 31
                                        1998          1997          1998          1997
                                 -----------   -----------   -----------   -----------
<S>                                   <C>           <C>           <C>            <C>
      Advances                        72,263        43,302        17,236         9,796
                                      ------        ------        ------        ------

      Less -
            land                       6,586        14,338         4,708         3,147
            construction work         46,245        24,619         9,925         5,591
                                      ------        ------        ------        ------

                                      52,831        38,957        14,633         8,738
                                      ------        ------        ------        ------

                                      19,432         4,345         2,603         1,058
                                      ======        ======        ======        ======
</TABLE>

Note 14 - Credit from Banking Entities

<TABLE>
<CAPTION>
                                                                        Consolidated
                                           Terms of      ---------------------------
                                        linkage and      December 31     December 31
                                           interest             1998            1997
                                        -----------      -----------    ------------
<S>                                   <C>                     <C>             <C>
      Overdraft                          Prime + 1%           14,483          10,511
      Import financing                 German marks            3,017           3,001
      Short-term loans                13.8% - 15.2%                           13,855
                                                              ------          ------

                                                              17,500          27,367
                                                              ======          ======
</TABLE>

Note 15 - Suppliers and Subcontractors

<TABLE>
<CAPTION>
                                                                          Consolidated
                                                           ---------------------------
                                                           December 31     December 31
                                                                  1998            1997
                                                           -----------     -----------
<S>                                                             <C>              <C>
               Current accounts                                 10,107           6,108
               Checks and notes payable                          3,948           3,804
                                                                ------           -----

                                                                14,055           9,912
                                                                ======           =====
</TABLE>


                                                                            F-33
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 16 - Creditors and Credit Balances

<TABLE>
<CAPTION>
                                                 Consolidated                   The Company
                                   --------------------------    --------------------------
                                   December 31    December 31    December 31    December 31
                                          1998           1997           1998           1997
                                   -----------    -----------    -----------    -----------
<S>                                     <C>            <C>             <C>            <C>
Sellers of land                         11,570            592
Income received in advance               4,779          3,834
Employees and other liabilities
 related to salaries                     6,762          4,470          1,865          1,704
Institutions                            26,906         21,200          8,942          7,489
Subsidiary - current account*                                                        19,724
Provision for completion of
 construction                           41,201         14,398          6,550          3,418
Liability relating to
 appreciation tax and
 consent fees                            8,254         10,317
Expenses payable                        13,139         16,474          1,712          1,129
Others                                  15,122          5,872            586          1,022
                                   -----------    -----------    -----------    -----------

                                       127,733         77,157         19,655         34,486
                                   ===========    ===========    ===========    ===========
</TABLE>

*     Bear annual interest at rates of 2% (1997 - bear annual interest at prime
      rate).

Note 17 - Deferred Taxes

      1.    Composition:

<TABLE>
<CAPTION>
                 In respect of  In respect of   Other timing          Total          Total
                   depreciable       building    differences
                  fixed assets       projects                  December 31,    December 31,
                                less advances                          1998            1997
                 -------------  -------------   ------------   ------------    ------------
<S>                     <C>            <C>             <C>          <C>            <C>
A.  Consolidated
Balance as at
 beginning of
 year                   (8,577)        (9,491)         7,776        (10,292)       (29,508)
Changes                 (3,510)        15,465           (673)        11,282         19,216
                       -------         ------          -----        -------        -------
Balance as at
 end of year           (12,087)         5,974          7,103            990        (10,292)
                       =======         ======          =====        =======        =======

B.  The Company
Balance as at
 beginning of
 year                       21          1,407            613          2,041          3,712
Changes                     (5)           (17)            62             40         (1,671)
                       -------         ------          -----        -------        -------
Balance as at
 end of year                16          1,390            675          2,081          2,041
                       =======         ======          =====        =======        =======
</TABLE>


                                                                            F-34
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

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
                                     1998           1997           1998           1997
                              -----------    -----------    -----------    -----------
<S>                                <C>             <C>            <C>            <C>
Under current assets               15,906          5,537          3,845          3,384
Under other assets                  9,630          7,963
Under current liabilities                         (2,347)                          (49)
Under long-term liabilities       (24,546)       (21,445)        (1,764)        (1,294)
                              -----------    -----------    -----------    -----------

                                      990        (10,292)         2,081          2,041
                              ===========    ===========    ===========    ===========
</TABLE>

Note 18 - Long-term Liabilities

      A.    Composition in the consolidated balance sheet:

<TABLE>
<CAPTION>
                                                                Consolidated  Consolidated
                                         -----------------------------------  ------------
                                                           December 31, 1998          1997
                                         -----------------------------------  ------------
                                           Total       Current       Balance       Balance
                                                    maturities
                                         -------    ----------       -------  ------------
<S>                                      <C>             <C>         <C>           <C>
Convertible debentures                   248,325         7,856       240,469       248,254
Debentures (2)                            38,891         5,652        33,239        38,992
Liabilities to banks (3)                 230,645         9,169       221,476        99,941
Liabilities to provident funds (4)       161,171        30,050       131,121       123,750
Other liabilities (5)                     60,151                      60,151        63,601
                                         -------        ------       -------       -------

                                         739,183        52,727       686,456       574,538
                                         =======        ======       =======       =======
</TABLE>

      1.    Convertible debentures

      (a)   Convertible debentures, with a balance, as at balance sheet date, of
            NIS 51,676 thousand were issued by Hadarim Properties Ltd. (a
            subsidiary) per a prospectus published on February 28, 1996.

            The debentures bear interest at the rate of 3.5% p.a.. Both
            principal and interest are linked to the CPI published for February
            1996, 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 for each ordinary share of a par value of NIS 1. After
            February 8, 2001 the debentures will no longer be convertible.


                                                                            F-35
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 18 - Long-term Liabilities (cont'd)

            The market value of the debentures as at December 31, 1998 is NIS
            53,013 thousand. (December 31, 1997 - NIS 55,113)

            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 54,779 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 for 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 141,870 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 for each
            ordinary share of a par value of NIS 1. After August 31, 2001 the
            debentures will no longer be convertible.

            The market value of the debentures as at December 31, 1998 is NIS
            123,375 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.


                                                                            F-36
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 18 - Long-term Liabilities (cont'd)

      A.    Composition: (cont'd)

      2.    Debentures

      Composition:

                                                                    Consolidated
                                                --------------------------------
                                                December 31          December 31
                                                       1998                 1997
                                                -----------          -----------

      Total debentures                               38,891               44,665
      Current maturities                              5,652                5,673
                                                -----------          -----------

                                                     33,239               38,992
                                                ===========          ===========

      Series B

      Marketable debentures, the balance of which as at the balance sheet date
      was NIS 38,891 thousand were issued by Property and Building (Finance
      1986) Limited (subsidiary) per a 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 1998 - 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 the debentures at December 31, 1998 is NIS 33,327 thousand.

      Series - 6 and 7

      Debentures from these series were issued in the past by the Company, and
      transferred to Property and Building (Finance 1986) Limited (subsidiary)
      as part of a court approved reorganization between the companies,
      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 bore
      interest at the rate of 5% per annum and were linked (principal 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 undertook 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).


                                                                            F-37
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 18 - Long-term Liabilities (cont'd)

      A.    Composition: (cont'd)

      3.    Liabilities to banks

<TABLE>
<CAPTION>
                                                           December 31    December 31
                     Interest                     Current         1998           1997
                         rate         Total    maturities
                     --------                                   -------       -------
                            %                                   Balance       Balance
                     --------       -------    ----------       -------       -------
<S>                <C>              <C>             <C>         <C>            <C>
Consolidated
 balance sheet     4.7 - 4.95       230,645         9,169       221,476        99,941
                                    =======       =======       =======       =======
</TABLE>

      4.    Liabilities to provident funds

<TABLE>
<S>                       <C>       <C>           <C>           <C>           <C>
Consolidated
 balance sheet            4.9       161,171        30,050       131,121       123,750
                                    =======       =======       =======       =======
</TABLE>

      The liabilities at (3) and (4) are linked to the consumer price index.

      5.    Other long-term liabilities

            The liability is non-interest bearing and is linked to the
            construction input index see Note 20C(5).

      B.    Composition in the Company balance sheet:

      (1)   Other long-term liabilities

            Loans from subsidiaries bear interest of 4% and are linked to the
            consumer price index.

      (2)   A capital note of NIS 20,000 bears an annual interest rate that
            cannot exceed 30% of the rate of increase in the consumer price
            index.


                                                                            F-38
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 18 - Long-term Liabilities (cont'd)

      C.    Classification of long-term liabilities by years of maturity

<TABLE>
<CAPTION>
                                                Consolidated               The Company
                                   -------------------------  ------------------------
                                   December 31   December 31  December 31  December 31
                                          1998          1997         1998         1997
                                   -----------   -----------  -----------  -----------
<S>                                    <C>           <C>            <C>          <C>
      Within 12 months -
       current maturities               52,727        47,943        2,191        2,609
                                   ===========   ===========  ===========  ===========

      During second year               154,167        52,147        2,191        2,200
      During third year                110,682       142,600        2,191        2,200
      During fourth year               110,659        86,240        2,192        2,200
      During fifth year                 84,573        81,975                     2,198
      Beyond fifth year till 2005      166,224       147,975
      Without redemption date*          60,151        63,601
                                   -----------   -----------  -----------  -----------

                                       686,456       574,538        6,574        8,798
                                   ===========   ===========  ===========  ===========
</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
                                          1998          1997         1998         1997
                                   -----------   -----------  -----------  -----------
<S>                                      <C>           <C>            <C>          <C>
      Liability in respect of
       employee severance*               9,302         8,145          457          474
      Less - amounts funded*             5,860         5,579          457          474
                                   -----------   -----------  -----------  -----------

                                         3,442         2,566           --           --
                                   ===========   ===========  ===========  ===========
</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, 1997 - NIS 2.4 millions) is included in the
            balance sheet as part of the above mentioned severance liability.


                                                                            F-39
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 20 - Contingent Liabilities and Commitments

      A.    Contingent liabilities

<TABLE>
<CAPTION>
                                                        Consolidated               The Company
                                           -------------------------  ------------------------
                                           December 31   December 31  December 31  December 31
                                                  1998          1997         1998         1997
                                           -----------   -----------  -----------  -----------
<S>                                                 <C>          <C>           <C>         <C>
      1.    Guarantees Granted

      (a)   In respect of dwelling
            purchase insurance                      55           288           55          288

      (b)   On behalf of subsidiaries
            in respect of -
            Performance guarantees                                            229          225
            Debentures                                                     38,891       44,665
</TABLE>

      The guarantees are linked mainly to the consumer price index and partly to
the construction inputs index.

      2.    Claims have been filed against the Company and subsidiaries, in the
            regular course of business, by apartment purchasers, alleging
            building defects and/or late delivery. 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.

      3.    A legal suit was filed in 1994 against a subsidiary regarding the
            distribution of profit from a project 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. 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 5,839 plus legal costs connected with the
            claim. 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.

      4.    Regarding the private placement of Hadarim Properties Ltd. (a
            subsidiary), the Company undertook to compensate Hadarim Properties
            Ltd. (with regards to the lots of the subsidiary in their respect of
            which a contract exists with Israel Land Administration) with the
            value of the lots, if by chance the above mentioned contract is not
            executed and the lots are returned to the Administration. Should
            payment be made to the Administration, Property and Building Ltd.
            will pay Hadarim Properties Ltd., a sum of not more than NIS 11.1
            million linked to the CPI of the month of September 1995, bearing
            interest of 8%.


                                                                            F-40
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 20 - Contingent Liabilities and Commitments (cont'd)

      B.    Liens

      1.    A subsidiary has pledged real estate in two projects as well as the
            assets and anticipated receipts of a project in favor of a bank (an
            interested party) in respect of the financing of 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, 1998, balances held by the bank, per
            the above arrangement, amounted to NIS 270,108 (nominal value) in
            debentures and NIS 702 thousand in cash (including short-term
            deposits) (December 31, 1997 - NIS 290,400 N.V. and NIS 776 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 271 million. (December
            31, 1997 - NIS 244 million).

      3.    A subsidiary leased part of a building to the Government of Israel
            for a term of 15 years, from 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.

      5.    In 1995, a subsidiary acquired 72% of the land rights in an area of
            72 dunams for a price of NIS 56.8 million, which will be paid in
            construction services.

      6.    After the balance sheet date, a contract was signed, between the
            Israeli Government and Carmelton Group Ltd., giving Carmelton the
            right to renovate, build, finance and operate the Carmel tunnels.
            The shareholders of Carmelton are an International Spanish Company,
            Drogdos (40%), Property and Building Ltd.(20%), Astrom (20%) and
            Fibi (20%). The expected cost of the project is $160 million. In
            addition, Carmelton will pay royalties of NIS 266 million to the
            Government of Israel.

      7.    After the balance sheet date, a deal was finalized between Bayside
            Ltd. (a subsidiary) and Industrial Information Center-Haifa (MATAM).
            According to the deal, MATAM will allot 50.1% of its shares to
            Bayside for NIS 246.5 million which will be invested in MATAM.


                                                                            F-41
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 21 - Income from Construction and Other Sources

<TABLE>
<CAPTION>
                                      Consolidated                                   The Company
                     ------------------------------------------------        -----------------------------
                      Year ended        Year ended         Year ended         Year ended        Year ended
                     December 31       December 31        December 31        December 31       December 31
                            1998              1997               1996               1998              1997
                     -----------       -----------        -----------        -----------       -----------
<S>                      <C>               <C>                <C>                 <C>               <C>
Apartments,
 stores and land         302,969           259,479            213,055             50,563            57,746
Air-conditioning
 systems and
 others                   30,783            31,561             35,569
Citrus crop                1,013             1,116              1,282
                     -----------       -----------        -----------        -----------       -----------

                         334,765           292,156            249,906             50,563            57,746
                     ===========       ===========        ===========        ===========       ===========
</TABLE>

Note 22 - The Company's Equity in the Net Earnings of Investee Companies

<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
                            1998              1997               1996               1998              1997              1996
                     -----------       -----------        -----------        -----------       -----------       -----------
<S>                        <C>               <C>               <C>               <C>                <C>               <C>
The Company's
 equity net, in the
 earnings of
 investee
 companies                 7,935             7,824             14,325            113,569            66,578            69,468
Portion of initial
difference
 amortized                (1,353)             (709)              (537)            (1,819)           (1,222)             (363)
                     -----------       -----------        -----------        -----------       -----------       -----------

                           6,582             7,115             13,788            111,750            65,356            69,105
                     ===========       ===========        ===========        ===========       ===========       ===========

Includes dividend
 received                  4,389             8,534              8,852             44,662            18,242            13,861
                     ===========       ===========        ===========        ===========       ===========       ===========
</TABLE>


                                                                            F-42
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

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
                                1998           1997           1996           1998           1997            1996
                         -----------    -----------    -----------    -----------    -----------     -----------
<S>                          <C>            <C>            <C>               <C>          <C>             <C>
Gains on
 realization of
 investments in
 investee
 companies                                  11,028             58                           665              58
Gains on sale
 of fixed
 assets and land             70,715            (43)         3,029             15                             23
                         ----------     ----------     ----------     ----------     ----------      ----------

                             70,715         10,985          3,087             15            655              81
                         ==========     ==========     ==========     ==========     ==========      ==========
</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
                                1998           1997           1996           1998           1997            1996
                         -----------    -----------    -----------    -----------    -----------     -----------
<S>                          <C>            <C>            <C>               <C>          <C>             <C>
Gains relating to
 marketable
 securities -
Appreciation
 (depreciation)
 in value                      3,126          3,463          1,300            (12)            27              25
Interest from
 securities                    2,514          1,923          1,118             14             15              15
                         -----------    -----------    -----------    -----------    -----------     -----------
                               5,640          5,386          2,418              2             42              40

Interest -
 From banks
  and others                   3,378          4,938          3,298                            64
 From investee
  companies                                                                    27              4             815
Management
 fees                          1,935          1,671          1,628          1,926          2,116           1,841
Other income                   1,729            801            175
                         -----------    -----------    -----------    -----------    -----------     -----------

                              12,682         12,796          7,519          1,955          2,226           2,696
                         ===========    ===========    ===========    ===========    ===========     ===========
</TABLE>


                                                                            F-43
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 25 - Construction and Other Costs

<TABLE>
<CAPTION>
                                      Consolidated                                   The Company
                     ------------------------------------------------        -----------------------------
                      Year ended        Year ended         Year ended         Year ended        Year ended
                     December 31       December 31        December 31        December 31       December 31
                            1998              1997               1996               1998              1997
                     -----------       -----------        -----------        -----------       -----------
<S>                      <C>               <C>                <C>                 <C>               <C>
Apartments,
 shops and land:
Construction
 expenses                180,261           140,790            112,113             34,087            36,879
Land                      54,755            37,062             23,232              5,086             6,301
Change in
 inventories of
 apartment and
 shops                   (19,704)            5,265              6,141             (5,846)           (1,439)
                     -----------       -----------        -----------        -----------       -----------
                         215,312           183,117            141,486             33,327            41,741
                     -----------       -----------        -----------        -----------       -----------

Air conditioning
 systems and
 others:
Materials and
 installation*            31,904            28,124             28,840
Change in
 inventories of
 air-conditioning
 and other
 equipment                (5,823)                2              3,904
                     -----------       -----------        -----------
                          26,081            28,126             32,744
                     -----------       -----------        -----------
Citrus crops -
Cultivating and
 picking
 expenses                  1,407             1,377              1,319
                     -----------       -----------        -----------

                         242,800           212,620            175,549             33,327            41,741
                     ===========       ===========        ===========        ===========       ===========

*  Including
 depreciation                695               734                604
                     ===========       ===========        ===========
</TABLE>


                                                                            F-44
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

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
                                1998           1997           1996           1998           1997            1996
                         -----------    -----------    -----------    -----------    -----------     -----------
<S>                          <C>            <C>            <C>               <C>          <C>             <C>
Salaries and
 related expenses             26,053         23,470         24,117          6,195          5,757           5,998
Directors' fees                  863            950          1,044            306            290             323
Professional
 services                      3,744          3,010          2,642            534            296             191
Office
 maintenance                   3,630          3,468          3,188          1,109          1,009             976
Other                          4,376          4,102          3,128            653            993             448
                         -----------    -----------    -----------    -----------    -----------     -----------
                              38,666         35,000         34,119          8,797          8,345           7,936
                         -----------    -----------    -----------    -----------    -----------     -----------
Less -
Directors fees
 received from
 affiliated
 companies                      (161)          (171)          (339)
Participation in
 expenses by a
 subsidiary                                                                  (567)          (517)           (513)
                         -----------    -----------    -----------    -----------    -----------     -----------

                              38,505         34,829         33,780          8,230          7,828           7,423
                         ===========    ===========    ===========    ===========    ===========     ===========

</TABLE>

The expected costs to complete computer system compliance with year 2000 is of
NIS 258 thousand. The accumulated cost to date for computer system compliance at
December 31, 1998 is NIS 247 thousand. Total costs for the year are NIS 247
thousand.


                                                                            F-45
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 27 - Selling and Marketing

<TABLE>
<CAPTION>
                                                      Consolidated                   The Company
                         -----------------------------------------    --------------------------
                          Year ended     Year ended     Year ended     Year ended     Year ended
                         December 31    December 31    December 31    December 31    December 31
                                1998           1997           1996           1998           1997
                         -----------    -----------    -----------    -----------    -----------
<S>                            <C>            <C>           <C>               <C>            <C>
Salaries and
 related
 expenses                      1,676          1,697         1,441
Advertising and
 others                        3,705          3,729         2,705             266            953
                         -----------    -----------    -----------    -----------    -----------
                               5,381          5,426         4,146             266            953
                         ===========    ===========    ===========    ===========    ===========
</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
                                1998           1997           1996           1998           1997            1996
                         -----------    -----------    -----------    -----------    -----------     -----------
<S>                           <C>            <C>            <C>             <C>            <C>             <C>
Depreciation                  24,811         22,025         19,738          1,028          1,021           1,340
Amortization                   3,064          2,429          1,835             31             29              31
                         -----------    -----------    -----------    -----------    -----------     -----------
                              27,875         24,454         21,573          1,059          1,050           1,371
                         ===========    ===========    ===========    ===========    ===========     ===========
</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
                                1998           1997           1996           1998           1997            1996
                         -----------    -----------    -----------    -----------    -----------     -----------
<S>                           <C>            <C>            <C>             <C>            <C>             <C>
To investee
 companies                                                                    936          1,177           3,372
In respect of
 debentures                    7,382          8,467          4,394
To banks and
 others                       18,562         17,678         13,499            100                             21
To income tax
 authority                       376              5              8            251
                         -----------    -----------    -----------    -----------    -----------     -----------
                              26,320         26,150         17,901          1,287          1,177           3,393
                         ===========    ===========    ===========    ===========    ===========     ===========
</TABLE>


                                                                            F-46
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

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 measurement of results for tax
      purposes, on a (non-inflationary) basis. The various adjustments required
      by the above Law are intended to result in taxation based on real income.
      This notwithstanding, adjustment of nominal profit according to the tax
      laws does not always equal the adjustment for inflation according to
      opinions of the Institute of Certified Public Accountants in Israel. As a
      result there are differences between adjusted profit per the financial
      statements and adjusted profit for tax purposes.

      B.    Carryforward to future years of losses and deductions for tax
            purposes

      Carryforward losses for tax purposes in subsidiary companies, adjusted for
      inflation are in the amount of NIS 15,840 thousand as at balance sheet
      date (December 31, 1997 - NIS 16,410 thousand). Losses from securities
      that are deductible in future years against real income from marketable
      securities amount to an adjusted amount of NIS 11,285 thousand at balance
      sheet date. (December 31, 1997 - NIS 16,527)

      Deductions for inflation of subsidiaries carried forward are in the amount
      of NIS 35,730 thousand (December 31, 1997 - NIS 32,035 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 7,070 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
                                1998           1997           1996           1998           1997            1996
                         -----------    -----------    -----------    -----------    -----------     -----------
<S>                           <C>            <C>            <C>             <C>            <C>             <C>
Provision for
 current year                 76,764         66,282         41,714          6,493          4,890             798
Taxes relating
 to prior years                 (605)           219            100           (177)                           (12)
Deferred taxes,
 net                         (11,282)       (19,216)         4,502            (40)         1,671          (1,793)
                         -----------    -----------    -----------    -----------    -----------     -----------

                              64,877         47,285         46,316          6,276          6,561          (1,007)
                         ===========    ===========    ===========    ===========    ===========     ===========
</TABLE>


                                                                            F-47
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 30 - Taxes on Income (cont'd)

      D.    Final tax assessments for the Company have been received up to and
            including 1997. Subsidiary companies have received final assessments
            for tax years 1987-1997. 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
                                         1998           1997           1996           1998           1997            1996
                                  -----------    -----------    -----------    -----------    -----------     -----------
<S>                                   <C>            <C>            <C>            <C>             <C>            <C>
Adjusted income before taxes
 per statement of earnings            218,984        147,014        141,607        128,382         79,984         66,901
Statutory tax rate (%)                     36             36             36             36             36             36
                                     --------       --------       --------       --------       --------       --------

Theoretical tax on the adjusted
 earnings                              78,834         52,925         50,978         46,217         28,794         23,793
Tax additions (savings) from:
Company's equity in the net
 earnings of investee companies        (2,370)        (2,561)        (4,963)       (40,230)       (23,527)       (24,878)
Realization of investments
 in and gain on issue of
 capital by investee companies                        (2,130)           (21)                         (236)           (29)
Expenses not  recognized  for
 tax purposes :
Depreciation and amortization           2,187          3,383          2,949            220            235            352
Others                                     51            162            162             30            152            128
Inflationary erosion of advance
 tax payments                           1,824            612          1,170            243              1             10
Income subject to reduced tax
 rates                                (12,785)          (268)          (995)
Losses carried forward from
 prior years                           (1,148)        (2,279)        (3,352)
Losses for which deferred taxes
 were not provided (mainly
 from securities)                      (1,277)        (1,233)         1,332
Outside shareholder interest in
 joint venture                             35             (2)          (180)
Other - mainly difference in
 inflationary adjustment
 principles for financial
 reporting purposes and for
 tax purposes                             131         (1,543)          (864)           (27)         1,142           (371)
Adjustments relating to
 prior years                             (605)           219            100           (177)                          (12)
                                     --------       --------       --------       --------       --------       --------
                                       64,877         47,285         46,316          6,276          6,561         (1,007)
                                     ========       ========       ========       ========       ========       ========
</TABLE>


                                                                            F-48
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 31 - Related Parties and Interested Parties

      Consolidated

<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
                                          1998           1997           1996           1998           1997            1996
                                   -----------    -----------    -----------    -----------    -----------     -----------
<S>                                   <C>            <C>            <C>            <C>             <C>            <C>
A.  Balance sheet data
Cash, security deposits
 and receivables                        93,932        154,143                        6,848           5,539
Subsidiary - current account*                                                       15,024
Loans from banks
 and provident funds                   154,190        164,578                        8,765          11,407
Creditors - Orchard
 cultivation and others                    868            709                                          558
Subsidiary - current account                                                                        20,353
Highest balance during the year                                                                     43,978
Subsidiary - capital note                                                           20,000

B.  Statement of earnings data
Financing income from
 deposits and loans
From investee companies                                                                 26               3            815
From banks and others                    2,926          2,208          2,252            (8)                             8

Participation of related
 parties in general expenses                                                           567             517            513

Other income from
 related parties
Management fees                          1,935          1,671          1,628         1,926           2,116          1,841
Rent                                    24,067         24,027         15,282         1,275           1,504          1,301

Financing charges to
 related parties
Investee companies                                                                     936           1,141          3,372
Banks and others                        12,568          9,670          5,187

Benefits to an interested party
 employed by the Company:
Salary and fringe benefits**             1,706          1,598          1,507         1,706           1,598          1,507

Payments to members of
 the Board of Directors
 (1997 and 1998 for 8
 directors;
 1996 for 9 directors)                     306            290            323           306             290            323
</TABLE>

*     Represents the highest balance during the period.
**    During the reporting year, the interested party exercised options that had
      been granted to him in the past (see Note 32C). 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 445 thousand (1997 - difference in respect
      of utilization of rights to shares amounted to NIS 1,001 thousand).


                                                                            F-49
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

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 from regular market terms and prices.

Note 32 - Private Placement and Issue of Subsidiary

      A.    A security issue by the Company

      In May 1996 the Company issued 549,356 ordinary shares with a par value of
      NIS 1 per share, by way of rights to shareholders and unquoted option
      holders.

      In addition, the Company issued 7,357 ordinary shares to employees. The
      net proceeds of the issues was NIS 86,263 thousand.

      B.    Issues by subsidiaries

      1.    In the month of March 1996, the subsidiary, Hadarim Properties Ltd.,
            effected an issue to the public of registered debentures in the
            amount of NIS 49,988,750, (see Note 18A(1)(a)). The debentures 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. Proceeds from the public issues amounted
            to NIS 68,444 thousand.

            In addition, 2,072,600 ordinary shares with a par value of NIS 1 per
            share, were issued to shareholders of the subsidiary by way of
            rights. Proceeds of this issue amounted to NIS 90,025 thousand.

      2.    In the month of August 1997, the subsidiary, Hadarim Properties
            Ltd., effected a private placement of (nonmarketable) convertible
            debentures to the provident funds of Bank Discount Group, at a value
            of NIS 50 million. The debentures bear an interest rate of 2.5% p.a.
            Both the principal and interest rate are linked to the consumer
            price index and are convertible until August 12, 2001. The proceeds
            from the private placement amounted to NIS 49,938 thousand.


                                                                            F-50
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 32 - Private Placement and Issue of Subsidiary (cont'd)

      B.    Issues by subsidiaries (cont'd)

      3.    In the month of September 1997, the subsidiary, Bayside Land
            Corporation Ltd., effected an issue to the public of registered
            debenture in the amount of NIS 130,005 thousand N.V. The debentures
            bear interest of 2.5% p.a., are linked to the consumer price index
            and are convertible until August 31, 2001. (See Note 18A (1)(c)).

            270,000 share purchase option warrants which are exercisable until
            September 20, 2001, were also issued to the public.

            The proceeds from the public issues amounted to NIS 136,024
            thousand.

      C.    Share purchase option programs

      1.    The Company has the following share purchase option programs for its
            employees and for the employees of its subsidiaries:

            Share purchase option programs that have been exercised:

            (a)   A program dated May 1992 for the allotment of option warrants,
                  at no cost, to senior executives of the Company and of its
                  subsidiaries. From 1996 through 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
                  3,372 thousand, (as at balance sheet date). The loans bear
                  interest of 2% and are repayable in three annual installments
                  plus any consumer price index linkage differentials.

            (b)   A program dated October 1994 for the allotment of option
                  warrants, at no cost, to senior executives of the Company and
                  of its subsidiaries for the purchase of shares of the Company.
                  During 1998, the option holders exercised all the allotted
                  options of the program (according to a prospectus published on
                  May 1996 for the issue of rights of the Company). Total shares
                  purchased amounted to 14,650 at an aggregate price of NIS
                  3,731 thousand (as at the balance sheet date). Option holders
                  who are employees of the Company or its subsidiaries were
                  given loans of NIS 2,870 thousand (as at balance sheet date).
                  The loans bear interest of 2% and are repayable in three
                  annual installments plus any consumer price index linkage
                  differentials.


                                                                            F-51
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 32 - Private Placement and Issue of Subsidiary (cont'd)

      C.    Share purchase option programs (cont'd)

            Share purchase option program not yet exercised:

            A program dated December 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 (as of the balance sheet date). The exercise
            price of the remaining 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
            are 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., declared two share purchase option
                  programs for its senior employees:

                  Share purchase option program that has been exercised:

                  A program dated October 1994 for the allotment of option
                  warrants, at no cost to senior executives of the Company.
                  During the years 1997 and 1998 the option shareholders
                  exercised all the options allotted, based on the program, and
                  acquired 6,970 shares of the Company with a par value of NIS 1
                  per share at an aggregate price of NIS 2,600 thousand (as at
                  balance sheet date). Options holders, according to the
                  program, who are employees of the Company, were given loans of
                  NIS 1,676 thousand, (as at the balance sheet date), that will
                  be repaid in three installments starting November 1999.

                  Share purchase option program not yet exercised :

                  A program dated November 1997 for the allotment of option
                  warrants, to senior executives of the Company, for purchase of
                  12,418 shares of the Company. Under the assumption that all
                  the options under the plan are exercised the warrants will
                  provide 0.6.% of the equity in the Company and 0.9.% in the
                  voting rights.


                                                                            F-52
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 32 - Private Placement and Issue of Subsidiary (cont'd)

      C.    Share purchase option programs (cont'd)

      2.    Subsidiaries have share purchase option programs as described
            below:(cont'd)

            (b)   Hadarim Properties Ltd. allotted 8,727 share purchase option
                  warrants (Series 1) to its employees under a prospectus
                  published in February 1996. The said subsidiary also published
                  an option program on January 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 are exercised, all of the shares acquired represent
                  1.06% (0.86% in full dilution) of Hadarim Properties equity
                  and voting rights.

            (c)   Ispro Israel Company for building rental Ltd. (subsidiary),
                  published a share purchase option program in January 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 Ispro's equity and voting rights.

Note 33 - Financial Instruments and Risk Management

      A.    Risk management

      As at December 31, 1998 and 1997 the Group had cash and cash equivalents
      on deposit with Israeli banks in the amount of NIS 102,997 thousand and
      NIS 168,589 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 purchasers 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 instrument 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).


                                                                            F-53
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 34 - Condensed Financial Statements in Nominal Historical Values - The
          Company

      A.    Balance Sheet

                                                      December 31    December 31
                                                             1998           1997
                                                      -----------    -----------
      Current Assets
      Cash and cash equivalents                             1,220          1,504
      Marketable securities                                   576            593
      Other receivables                                    20,711          4,900
      Building projects under construction and
       apartments inventory                                11,004          3,357
                                                      -----------    -----------

                                                           33,511         10,354
                                                      -----------    -----------

      Land                                                    300          5,348
                                                      -----------    -----------

      Long-term Loans                                       3,237          2,615
                                                      -----------    -----------

      Investments
      In investee and other companies                     675,291        563,248
                                                      -----------    -----------

      Fixed Assets
      Buildings, land, plantations and others               9,858         10,126
      Less/- Accumulated depreciation                         686            599
                                                      -----------    -----------

                                                            9,172          9,527
                                                      -----------    -----------

      Deferred Charges                                         26             28
                                                      -----------    -----------

                                                          721,537        591,120
                                                      ===========    ===========


                                                                            F-54
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 34 - Condensed Financial Statements in Nominal Historical Values - The
          Company (cont'd)

      A.    Balance Sheet (cont'd)

                                                       December 31   December 31
                                                              1998          1997
                                                       -----------   -----------

      Current Liabilities
      Advances from purchasers of
       apartments and others, net                            2,832         1,402
      Current maturities of long-term liabilities            2,191         2,402
      Other payables                                        19,655        32,367
      Proposed dividend                                     20,000        17,000
                                                       -----------   -----------

                                                            44,678        53,171
                                                       -----------   -----------

      Long-term Liabilities
      Liabilities to banks and provident funds               6,574         8,100
      Capital note                                          20,000
                                                       -----------   -----------

                                                            26,574         8,100
                                                       -----------   -----------

      Shareholders' equity                                 650,285       529,849
                                                       -----------   -----------

                                                           721,537       591,120
                                                       ===========   ===========


                                                                            F-55
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 34 - Condensed Financial Statements in Nominal Historical Values - The
          Company (cont'd)

      B.    Statements of Earnings for the Year Ended December 31

                                                       1998      1997      1996
                                                    -------   -------    ------
      Income
      Rentals and warehousing                         9,378     7,643     6,827
      From construction                              47,022    49,084
      The Company's equity in the net
       earnings of investee companies, net          126,946    72,255    86,417
      Gains from investments and fixed assets            28     1,904        22
      Income from securities, financing
       and others income                              2,448     2,770     3,603
                                                    -------   -------    ------

                                                    185,822   133,626    96,869
                                                    -------   -------    ------

      Costs and expenses
      Construction                                   30,665    34,669
      Administrative, selling and others              8,307     8,014     6,340
      Property maintenance (excluding depreciation)   1,005       763       733
      Depreciation and amortization                     213       147       146
      Property taxes on land                            510       817       864
      Interest and linkage differences                3,966     4,214     9,720
                                                    -------   -------    ------

                                                     44,666    48,624    17,803
                                                    -------   -------    ------

      Earnings before taxes on income               141,156    85,002    79,066
      Taxes on income                                 4,853     5,005    (1,036)
                                                    -------   -------    ------

      Net earnings for the year                     136,303    79,907    80,102
                                                    =======   =======    ======


                                                                          F-56
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 34 - Condensed Financial Statements in Nominal Historical Value - The
          Company (cont'd)

      C.    Statement of Shareholders' Equity

                                       Share    Capital    Retained      Total
                                     capital    surplus    earnings
                                     -------    -------    --------     -------
      Balance as at
       January 1, 1996                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 year ended
       December 31, 1997                                    79,907       79,907
      Exercised option warrants          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

      Net earnings for current year                        136,303      136,303
      Exercised option warrants          15      4,118                    4,133
      Proposed dividend - 482.7%                           (20,000)     (20,000)
                                      -----     ------     -------      -------

                                      4,144     96,744     549,397      650,285
                                      =====     ======     =======      =======

      D.    Share capital (cont'd)

      1.    Composition

<TABLE>
<CAPTION>
                                            December 31, 1998        December 31, 1997
                                       ----------------------  -----------------------
                                       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   4,143,615   6,000,000    4,128,965
                                       ==========  ==========  ==========   ==========
</TABLE>


                                                                            F-57
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

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.

      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.


                                                                            F-58
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 35 - Statements for Incorporation in the Financial Statements of PEC
          (cont'd)

      B.    Condensed Financial Statements

      1.    Balance Sheet

                                                                    Consolidated
                                                    ----------------------------
                                                    December 31      December 31
                                                           1998             1997
                                                    -----------      -----------
      Current Assets

      Cash and cash equivalents                         102,985          155,017
      Short-term deposits and loans                       3,547            1,628
      Marketable securities                              13,223           35,509
      Trade receivables                                  49,091           20,501
      Other receivables and debit balances               62,602           30,844
      Apartments and other inventories                   62,805            5,482
      Building projects under construction               75,373          100,919
                                                      ---------        ---------

                                                        369,626          350,080
                                                      ---------        ---------

      Land                                              393,781          319,774
                                                      ---------        ---------

      Long-term Deposits                                  4,965            3,247
                                                      ---------        ---------

      Investments
      In investee companies                             120,769          102,505
                                                      ---------        ---------

      Fixed Assets

      Buildings, land and other                       1,109,056          856,560

      Less/ - Accumulated depreciation                  118,248          113,619
                                                      ---------        ---------

                                                        990,808          742,941
                                                      ---------        ---------

      Deferred Charges and Other  Assets                 85,801           65,419
                                                      ---------        ---------

                                                      1,965,750        1,583,966
                                                      =========        =========


                                                                            F-59
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

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
                                                                1998          1997
                                                         -----------   -----------
<S>                                                        <C>           <C>
Current Liabilities

Advances from purchasers of apartments and others, net        21,071        11,965
Credit from banks                                             19,900        28,955
Current maturities of long-term liabilities                   53,405        44,138
Suppliers and sub-contractors                                 14,055        22,379
Creditors and credit balances                                130,545        57,968
Deferred taxes                                                                 105
Proposed dividend                                             29,768        23,107
                                                           ---------     ---------

                                                             268,744       188,617
                                                           ---------     ---------

Long-term Liabilities

Long-term loans                                              723,734       551,475
Deferred taxes                                                 1,099         1,284
Liability in respect of employee  severance benefits           3,442         2,362
                                                           ---------     ---------

                                                             728,275       555,121
                                                           ---------     ---------

Minority interest                                            217,513       212,329
                                                           ---------     ---------
Receipt on account of option warrants in a subsidiary          8,665         8,665
                                                           ---------     ---------

Shareholders' Equity
Share capital                                                 81,327        81,312
Capital surplus                                               96,670        92,684
Retained earnings                                            564,556       445,238
                                                           ---------     ---------

                                                             742,553       619,234
                                                           ---------     ---------

                                                           1,965,750     1,583,966
                                                           =========     =========
</TABLE>


                                                                            F-60
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

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   December 31
                                                        1998          1997          1996
                                                 -----------   -----------   -----------
<S>                                                  <C>           <C>           <C>
Income
Rentals and warehousing                              150,363       135,647       114,593
From construction and other sources                  314,527       254,702       201,753
The Company's equity in the net
 earnings of investee companies                       13,231        12,435        16,710
Gains on sale of investments and fixed assets         77,163        12,652         2,780
Income from securities, financing and others          19,353        18,664        20,810
                                                 -----------   -----------   -----------
                                                     574,637       434,100       356,646
                                                 -----------   -----------   -----------
Cost and expenses
Construction and other costs                         206,232       176,030       135,188
Administrative, selling and others                    42,747        36,913        32,123
Property maintenance (excluding  depreciation)        12,827        11,231         9,598
Depreciation and amortization                         18,114        14,570        10,854
Property taxes on land                                 8,066         8,510         6,617
Financing (*)                                         76,042        48,699        34,239
                                                 -----------   -----------   -----------
                                                     364,028       295,953       228,619
                                                 -----------   -----------   -----------

Earnings before taxes on income                      210,609       138,147       128,027
Taxes on income                                       36,518        23,415        20,324
                                                 -----------   -----------   -----------

Earnings after taxation                              174,091       114,732       107,703

Less/ - Minority interest in earnings                 34,773        30,136        30,157
                                                 -----------   -----------   -----------

Net earnings                                         139,318        84,596        77,546
                                                 ===========   ===========   ===========

Earnings Per Share
Primary earnings per share of NIS 1.00 par
 value (in NIS)                                        33.62         20.53         19.92
                                                 ===========   ===========   ===========
Diluted earning per share                              32.66         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


                                                                            F-61
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

            of the real estate, resulting in an increase in the net earnings for
            the year ended December 31, 1996 of NIS 11,136 thousands.


                                                                            F-62
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Note 35 - Statements for Incorporation in the Financial Statements of PEC
          (cont'd)

      B.    Condensed Financial Statements (cont'd)

      3.    Statement of Shareholders' Equity

                                         Share   Capital   Retained     Total
                                       capital   surplus   earnings
                                       -------   -------   --------    --------
      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
                                       ------    ------    -------    -------

      Net earnings for the year
       ended December 31, 1998                             139,318    139,318

      Issue of Shares                      15     3,505                 3,520

      Paid in capital options, net                  481                   481

      Proposed dividend, net - 482.7%                      (20,000)   (20,000)
                                       ------    ------    -------    -------
      Balance as at
       December 31, 1998               81,327    96,670    564,556    742,553
                                       ======    ======    =======    =======


                                                                            F-63
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

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>
                                                                     Consolidated
                                          ---------------------------------------
                                          December 31   December 31   December 31
                                                 1998          1997          1996
                                          -----------   -----------   -----------
<S>                                           <C>            <C>           <C>
Nominal historical net income as per
 the statement of earnings                    136,303        79,907        80,102

Adjustment of differences relating to
 the following items:                           3,365         1,245           405

Advances from apartment purchasers                                           (195)
Construction work and land                      1,271          (544)       (2,677)
The Company's equity in the net earnings
 of investee companies                          2,974           657        (1,355)
Income from investments and fixed assets       (3,177)       (1,881)           19
Financing                                      (2,567)          854        (2,609)
Depreciation and amortization                  (3,073)       (3,169)       (3,287)
Deferred taxes                                  6,859         9,113         8,370
Minority interest in earnings                    (125)       (1,758)         (701)
Others                                         (2,512)          172          (526)
                                          -----------   -----------   -----------
Net income for the special purpose
 statement of earnings                        139,318        84,570        77,546
                                          ===========   ===========   ===========
</TABLE>


                                                                            F-64
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Annex - Percentage of Holding in Investee Companies as at December 31, 1998

<TABLE>
<CAPTION>
                                                         1998                    1997
                                        ----------------------  ----------------------
                                        Percent of holding (1)  Percent of holding (1)
                                        ----------------------  ----------------------
                                           Voting     Equity        Voting     Equity
                                        ---------     ------    ----------     ------
                                                %          %             %          %
                                        ---------     ------    ----------     ------
<S>                                         <C>        <C>           <C>        <C>
      Subsidiary companies

      Bayside Land Corporation Ltd.*(2)     73.74      67.44         70.58      64.42
      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.                    73.94      73.94         66.38      66.38
      Shadar Building Company Ltd.            100        100           100        100
      Merkaz Herzlia "A" Ltd.                 100        100           100        100
      Merkaz Herzlia "B" Ltd.(4)              100      74.16           100        100
      "Hon" Investment and Trust
       Company Ltd.                           100        100           100        100
      Property and Building
       (Finance 1986) Ltd.                    100        100           100        100
      Aclim 2000 for Ecology Ltd.             100        100           100        100
      "Gilat" Building and Housing
       in Development Areas Ltd.              100        100           100        100
      Nichsei Nachalat Beit
       Hashoeva B.M                           100        100           100        100
      Em Hamoshavot - Hatzafon
       Hachadash                              100        100           100        100

      Affiliated companies

      Science Based Industries                 50         50            50         50
       Campus Ltd.
      Mehadrin Ltd.                         34.96      34.96         34.96      34.96
      Bartan Holdings and
       Investment Ltd.                      30.93      30.93         30.93      30.93
      K.B.A Townbuilders Group Ltd.(7)      23.13      23.13         23.13      23.13
      Carneltan Group Ltd.                  20.00      20.00
</TABLE>

      (1)   Including shareholding through subsidiaries.

      (2)   Conversion of the Consolidated Companies will dilute the Companies
            holdings from 56.22% in capital stock and 57.32% in voting.


                                                                            F-65
<PAGE>

                      Property and Building Corporation Limited and Subsidiaries

Notes to the Financial Statements as at December 31, 1998 (in NIS thousands)
--------------------------------------------------------------------------------

Annex - Percentage of Holding in Investee Companies as at December 31, 1998

      (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 results in the dilution of the
            Company's holding to 76.78%.

            The conversion of non marketable debentures of the subsidiary,
            together with the previous conversions will result in a dilution of
            the Company's holding to 73.46%.

      (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)   See Note 20C(6).

      (7)   As to the dilutive influence of the Consolidated Employee Option
            Plan - See Note 32C(2).


                                                                            F-66