AMPAL-AMERICAN ISRAEL CORP
As used in this report (the “Report”), the term “Ampal” or “registrant” refers to Ampal-American Israel Corporation. The term “Company” refers to Ampal and its consolidated subsidiaries. Ampal is a New York corporation founded in 1942.                   For industry segment financial information and financial information about foreign and domestic operations, see Note 13 to the Company’s consolidated financial statements included elsewhere in this Report. The companies described below under –“Telecommunication,” “High Technology” and “Capital Markets and Other Holdings” are included in the Finance segment. The companies described under “Real Estate” are included in the Real Estate segment. The companies described under “Leisure-Time” are included in the Leisure-Time segment.                   The Company primarily acquires interests in businesses located in the State of Israel or that are Israel-related. Ampal’s investment focus is principally on companies or ventures where Ampal can exercise significant influence, on its own or with investment partners, and use its management experience to enhance those investments. An important objective of Ampal is to seek investments in companies that operate in Israel initially and then expand abroad. In determining whether to acquire an interest in a specific company, Ampal considers quality of management, potential return on investment, growth potential, projected cash flow, investment size and financing, and reputable investment partners.                   The Company’s strategy is to invest opportunistically in undervalued assets with an emphasis on the following sectors: Energy, Real Estate and Project Development and Leisure Time. We believe that past experience, current opportunities and a deep understanding of the above-referenced sectors both domestically in Israel and internationally will allow the Company to bring high returns to its shareholders. The Company emphasizes investments which have long-term growth potential over investments which yield short-term returns.                   The Company provides its investee companies with ongoing support through its involvement in the investees’ strategic decisions and introduction to the financial community, investment bankers and other potential investors both in and outside of Israel.                   On December 1, 2005, the Company acquired a 2% interest in East Mediterranean Gas Company, an Egyptian joint stock company which has been given the right to export natural gas from Egypt to Israel and other locations in the East Mediterranean basin. On October 3, 2005, the Company sold its interest in MIRS Communications Ltd. which it held through Ampal Communications L.P., a limited partnership controlled by Ampal and in which Ampal holds a 75% equity interest.                   Listed below by industry segment are all of the substantial investee companies in which the Company had ownership interests as of December 31, 2005, the principal business of each and the percentage of equity owned, directly or indirectly, by Ampal. The table below also indicates whether the investee’s securities are listed on the New York Stock Exchange (“NYSE”), NASDAQ National Market (“Nasdaq”), the American Stock Exchange (“AMEX”) or the Tel Aviv Stock Exchange (“TASE”). Further information with respect to the more significant investee companies is provided after the following table. For additional information concerning the investee companies, previously provided annual reports on Forms 10-K of Ampal are incorporated by reference herein.       3      Industry Segment Principal Business Percentage as of December 31, 2005(1)                   Energy                            East  Mediterranean Gas Company (E.M.G)   Natural Gas Provider & Pipeline Owner    2.0             Real Estate       Am-Hal Ltd   Chain of Senior Citizen Facilities    100.0      Ampal (Israel) Ltd   Holding Company and Real Estate    100.0      Bay Heart Limited   Shopping Mall Owner/Lessor    37.0      Ophir Holdings Ltd. ("Ophir Holdings")   Holding Company    42.5      Lysh The Coastal High-way Ltd   Commercial Real Estate    10.6 (2)    Meimadim Investments Ltd.   Commercial Real Estate    4.2 (2)    New Horizons (1993) Ltd   Commercial Real Estate    34.0 (2)           Leisure-Time       Coral World International Limited   Underwater Observatories and Marine Parks    50.0      Country Club Kfar Saba Limited   Country Club Facility    51.0      Hod Hasharon Sport Center (1992)      Limited Partnership   Country Club Facility    50.0             Finance:              Capital Markets and Other Holdings       Ampal Development (Israel) Ltd   Holding Company    100.0      Ampal Holdings (1991) Ltd   Holding Company    100.0      Carmel Container Systems Limited   Packaging Materials and Carton Production        Holding Company    21.8      Fimi Opportunity Fund, L.P   Investment Fund    2.1               High Technology         --      Telecommunication         --        (1)                  Based upon current ownership percentage. Does not give effect to any potential                dilution.        (2)                  As of December 31, 2005, Ophir Holdings held the following percentage interests:                                 Lysh The Coastal High-way Ltd.      25.0         Meimadim Investments Ltd.    10.0         New Horizons (1993) Ltd.    80.0              The Company’s percentage interest in the above-referenced companies set forth in the chart reflects the Company’s 42.5% ownership of Ophir Holdings.       Significant Developments Since the Fiscal Year Ended December 31, 2005        None      4     Energy           EAST MEDITERRANEAN GAS COMPANY (“EMG”)           On December 1, 2005, the Company, through Merhav Ampal Energy, Ltd., a wholly-owned subsidiary of the Company, entered into an agreement with Merhav M.N.F. Ltd. (“Merhav”) for the purchase from Merhav of a portion of its interest in EMG. Under the terms of the transaction, the Company acquired the beneficial ownership of 1,200 shares of EMG’s capital stock, representing a 2% beneficial ownership in EMG. The purchase price for the shares was $29,960,000. Additionally, the Company was granted the exclusive right to negotiate to acquire a substantial portion of Merhav’s remaining shares of EMG. The Company also has the right for a period of time to require Merhav to repurchase the EMG interest.           EMG is an Egyptian joint stock company organized in accordance with the Egyptian Special Free Zones system which has been given the right to export natural gas from Egypt to Israel and other locations in the East Mediterranean basin and other countries. Egyptian natural gas shall reach the Israeli market via an underwater pipeline owned by EMG, which EMG expects to be completed during 2007. (See also Item 7. Related Party Transactions).   Real Estate           In Israel, most land is owned by the Israeli government. In this Report, reference to ownership of land means either direct ownership of land or a long-term lease from the Israeli Government, which in most respects is regarded in Israel as the functional equivalent of ownership. It is the Israeli government’s policy to renew its long-term leases (which usually have a term of 49 years) upon their expiration.           AM-HAL LTD. (“AM-HAL”)           Am-Hal is a wholly-owned subsidiary of the Company, which develops and operates luxury retirement centers for senior citizens.           In March 1992, the first center was opened in Rishon LeZion, a city located approximately 10 miles south of Tel-Aviv. This center, of about 120,000 square feet, includes 149 self-contained apartments, a 74-bed nursing care ward, a 21-bed assisted-living ward, a swimming pool, a health care center and other recreational facilities. The nursing care ward is leased to a non-affiliated health care provider until 2006.           In June 2000, the second center was opened in Hod Hasharon, a city located approximately 7 miles north of Tel Aviv. This center, which is approximately 250,000 square feet, includes 235 self-contained apartments, a 33-bed nursing care ward and a 22-bed assisted-living ward.           On April 7, 2005 Am-Hal Ltd. entered into an agreement to build a new project in Tel-Aviv. Am-Hal Ltd. holds 75% of the new project through a limited partnership (Ad 120 Ramat-Hahayal), the project, which is in its early stages, is still subject to further regulatory and financing approvals.           AMPAL HOLDINGS (1991) LTD. (“AMPAL HOLDINGS”)           In 2004, as part of the Company’s reorganization of certain of its wholly owned subsidiaries, Ampal Holdings purchased most of the high-tech investee companies from Ampal Industries (Israel) Ltd. In 2005, Ampal Holdings sold most of its investee companies.           AMPAL (ISRAEL) LTD. (“AMPAL ISRAEL”)           In 2004, as part of the Company’s reorganization of certain of its wholly owned subsidiaries, Ampal Israel purchased various investee companies from Ampal Industries (Israel) Ltd.   5             OPHIR HOLDINGS LTD. (“OPHIR HOLDINGS”)           Ophir Holdings is a holding company that owns interests in real estate companies and is owned 42.5% by the Company. The Company and Polar Investments Ltd., which owns 57.5% of Ophir Holdings, are parties to a shareholders’ agreement regarding joint voting, directorships and rights of first refusal with respect to Ophir Holdings.           Ophir Holdings’ owns a 25% equity interest in Lysh The Coastal High-way Ltd. (“Lysh”). Lysh has a 50% holding in Beit Herut-Lysh Development Company Ltd. (“BHL”), which is constructing a 180,000 square foot commercial project for rental near Moshav Beit Herut on land owned by the Israeli Land Authority. Ophir Holdings has also undertaken to provide guarantees in an amount equivalent to 25% of the construction costs. As of December 31, 2005, BHL had taken out bank loans of approximately $14.3 million, by drawing on a credit line extended by a financial institution in connection with the project.           Ophir Holdings owns a 10% interest in a joint venture which had agreed to purchase 4.4 million square feet of land near Haifa for approximately $15 million, on which the parties intend to develop a commercial real estate project for rent. Ophir Holdings has obligated itself to invest up to $1.5 million in the first stage of this project and its share of development costs is estimated to be as much as $17 million.           BAY HEART LIMITED (“BAY HEART”)           Bay Heart was established in 1987 to develop and lease a shopping mall (the “Mall”) in the Haifa Bay area. Haifa is the third largest city in Israel. The Mall, which opened in May 1991, is a three-story facility with approximately 280,000 square feet of rentable space. The Mall is located at the intersection of two major roads and provides a large mix of retail and entertainment facilities including seven movie theaters. The total cost of the Mall was approximately $53 million, which was financed principally with debt instruments. A train station on the west side of the Mall was completed in September 2001. A transportation complex, in conjunction with a subsidiary of Egged Bus Corporation, was opened in January 2002. The Company owns 37% of Bay Heart. Bay Heart has refinanced the loan relating to the Mall, which loan has a fifteen years term. Bay Heart received an additional approval for NIS. 18.5 million for renovating the Mall which started in 2005. The Company has agreed to guarantee a portion of the new loan in an amount equal to NIS 6.8 million.   Leisure-Time           CORAL WORLD INTERNATIONAL LIMITED (“CORAL WORLD”)           Coral World, which is 50%-owned by the Company, owns and controls three marine parks in Eilat (Israel), Perth (Australia) and Maui (Hawaii).           Coral World’s Eilat marine park is located next to the coral reefs and visitors to this park view marine life in its natural coral habitat through a unique underwater observatory. Coral World’s marine parks in Perth and Maui allow visitors to walk through a transparent acrylic tube on the bottom of a man-made aquarium surrounded by marine life. In addition to admission charges, Coral World derives significant revenue from its food and beverage facilities and retail outlets.           Coral World’s parks hosted 1,034,283 visitors during 2005. Coral World has approximately 220 full-time equivalent positions as of December 31, 2005.           Coral World has entered into a joint development project for a new marine park in Palma de Majorca which is scheduled to open at the end of 2006.   6             COUNTRY CLUB KFAR SABA LIMITED (“KFAR SABA”)           Kfar Saba operates a country club facility (the “Club”) in Kfar Saba, a town north of Tel Aviv. Kfar Saba holds a long-term lease to the real estate property on which the Club is situated. The Club’s facilities include swimming pools, tennis courts and a clubhouse. The Club currently is seeking to obtain building permits for an additional 30,000 square feet of commercial development on the Club grounds.           The Club, which has a capacity of 2,000 member families, had approximately 1,735 member families for the 2005 season. The Company owns 51% of Kfar Saba.           HOD HASHARON SPORT CENTER (1992) LIMITED PARTNERSHIP (“HOD HASHARON”)           Hod Hasharon operates a country club facility (the “H.H. Club”) in Hod Hasharon, a town north of Tel Aviv. The H.H. Club, which opened in July 1994 and has a capacity of 1,600 member families, has operated at capacity for the past three years. In 2005, the H.H. Club repaid owner’s loans of $0.2 million to each of the partners. As of December 31, 2005, the Company holds a 50% direct interest in Hod Hasharon.   Capital Markets And Other Holdings           AMPAL DEVELOPMENT (ISRAEL) LTD. (“AMPAL DEVELOPMENT”)           Ampal Development, a wholly owned subsidiary of the Company, issued debentures which were publicly traded on the TASE. An aggregate of approximately $2.0 million of these debentures were outstanding as of December 31, 2004. On March 1, 2005, Ampal Development paid off all of its outstanding and remaining debentures which were publicly traded on the TASE.           CARMEL CONTAINERS SYSTEMS LIMITED (“CARMEL”)           Carmel is one of the leading Israeli companies in designing, manufacturing and marketing carton boards and packaging products. Carmel and its subsidiaries manufacture a varied line of products, including corrugated shipping containers, moisture-resistant packaging, consumer packaging, triple-wall packaging and wooden pallets and boxes. The Company’s equity interest in Carmel is 21.75%. As of December 31, 2005, the Company accounts for this investment pursuant to the equity method as $2.4 million (which includes impairment in an amount of $3.0 million).   EMPLOYEES           On March 31, 2004, the Company closed its New York office located at 555 Madison Ave, New York, New York. Other than the executives officers listed in Item 11 below, Ampal has no other employees. As of December 31, 2005, Ampal (Israel) Ltd. had 13 employees, Am-Hal Ltd. (a wholly owned subsidiary of Ampal) had 170 employees and Country Club Kfar Saba Ltd. (owned 51% by the Company) had 103 employees.           Relations between the Company and its employees are satisfactory.   CONDITIONS IN ISRAEL           Most of the companies in which Ampal directly or indirectly invests conduct their principal operations in Israel and are directly affected by the economic, political, military, social and demographic conditions there. A state of hostility, varying as to degree and intensity, exists between Israel and the Arab countries and the Palestinian Authority (the “PA”). Israel signed a peace agreement with Egypt in 1979 and with Jordan in 1994. Since 1993, several agreements have been signed between Israel and Palestinian representatives regarding conditions in the West Bank and Gaza. While negotiations have taken place between Israel, its Arab neighbors and the PA to end the state of hostility in the region, it is not possible to predict the outcome of these negotiations and their eventual effect on Ampal and its investee companies. Political developments in Israel, notably the ability of the Hamas movement to win a majority of seats in the Palestinian parliament has increased the economic, political and military uncertainty in Israel and the Middle East. See Item 1A “Risk Factors” below for further discussion of the possible impact of this situation on the Company.   7             All male adult citizens and permanent residents of Israel under the age of 48 are obligated, unless exempt, to perform military reserve duty annually. Additionally, all these individuals are subject to being called to active duty at any time under emergency circumstances. Some of the officers and employees of Ampal’s investee companies are currently obligated to perform annual reserve duty. While these companies have operated effectively under these requirements since they began operations, Ampal cannot assess the full impact of these requirements on their workforce or business if conditions should change. In addition, Ampal cannot predict the effect on its business in a state of emergency in which large numbers of individuals are called up for active duty.   Economic and Financial Developments           In 2005, unemployment in Israel averaged 9.0%. The rate of unemployment in 2004 averaged 10.4% as compared to 10.7% in 2003. Management believes that the decrease resulted mainly from the improvement in the industrial and high tech sectors and the Israeli government’s employment initiatives.           2005 was characterized by rapid growth in all components of Israeli GDP. The GDP grew by 5.2% and the business-sector product grew by 6.7%. In 2004 and 2003, GDP growth was 4.4% and 1.7%, respectively.           The change in consumer price index in 2005 was 2.4% compared to 1.2 % in 2004.           CERTAIN UNITED STATES AND ISRAELI REGULATORY MATTERS   SEC Exemptive Order           In 1947, the SEC granted Ampal an exemption from the Investment Company Act of 1940, as amended (the “1940 Act”), pursuant to an Exemptive Order. The Exemptive Order was granted based upon the nature of Ampal’s operations, the purposes for which it was organized, which have not changed, and the interest of purchasers of Ampal’s securities in the economic development of Israel. There can be no assurance that the SEC will not reexamine the Exemptive Order and revoke, suspend or modify it. A revocation, suspension or material modification of the Exemptive Order could materially and adversely affect the Company unless Ampal were able to obtain other appropriate exemptive relief. In the event that Ampal becomes subject to the provisions of the 1940 Act, it could be required, among other matters, to make changes, which might be material, to its management, capital structure and methods of operation, including its dealings with principal shareholders and their related companies.   TAX INFORMATION           Ampal (to the extent that it has income derived in Israel) and Ampal’s Israeli subsidiaries are subject to taxes imposed under the Israeli Income Tax Ordinance. Through December 31, 2003, the corporate tax rate was 36%. In July 2004, Amendment No. 140 to the Income Tax Ordinance was enacted. One of the provisions of this amendment is that the corporate tax rate is to be gradually reduced from 36% to 30%. In August 2005, a further amendment (No. 147) was published, which makes a further revision to the corporate tax rates prescribed by Amendment No. 140. As a result of the aforementioned amendments, the corporate tax rates for 2004 and thereafter are as follows: 2004 – 35%, 2005 – 34%, 2006 – 31%, 2007 – 29%, 2008 – 27%, 2009 – 26% and for 2010 and thereafter – 25%.   8             A tax treaty between Israel and the United States became effective on January 1, 1995 (“the Treaty”). The Treaty has not substantially affected the tax position of the Company in either the United States or in Israel.           Ampal generated income from interest and dividends resulting from its investments in Israel. Under Israeli law, Ampal has been required to file tax returns, with the Israeli tax authorities with respect to such income. Under Israeli domestic law Ampal, as a non-resident, is generally subject to withholding tax at a rate of 25% on dividends it receives from Israeli companies (20% as of January 1, 2006). This rate may be reduced to either 15% or 12.5%, (under Israeli law and/or the provisions of the Treaty), depending on the ownership percentage in the investee company, and on the type of income generated by such investee company, from which the dividend is distributed (by contrast, dividends received by one Israeli company from another Israeli company are generally exempt from Israeli corporate tax, unless (i) they arise from income generated from sources outside of Israel, in which case they are subject to tax at a rate of 25%; or (ii) they are paid out of the profits of an “approved enterprise” to either residents or non-residents, in which case tax is withheld at a rate of 15%).           Pursuant to an arrangement with the Israeli tax authorities, Ampal’s income from Israeli sources has been taxed based on principles generally applied in Israel to income of non-residents. Ampal has filed tax returns with the Israeli tax authorities through the tax year 2004. Based on the tax returns filed by Ampal through 2004, it has not been required to make any additional tax payments in excess of the tax withheld on dividends it has received. In addition, pursuant to Ampal’s arrangement with the Israeli tax authorities, the aggregate taxes paid by Ampal in Israel and in the United States on interest, rent and dividend income derived from Israeli sources has not exceeded the tax which would have been payable by Ampal in the United States had such interest, rent and dividend income been derived by Ampal from United States sources. There can be no assurance that this arrangement will continue to be effective in the future. This arrangement does not apply to taxation of Ampal’s Israeli subsidiaries.           Generally, under the provisions of the Israeli Income Tax Ordinance, taxable income from Israeli sources paid to non-residents of Israel by residents of Israel is subject to withholding tax at the rate of 25%. However, such rate of withholding tax may be reduced under the Treaty, with respect to certain payments made by Israeli tax residents to US tax residents that qualify for benefits of the Treaty. For example, under the Treaty, the rate of withholding tax applicable to interest is generally reduced to 17.5%. The continued tax treatment of Ampal by the Israeli tax authorities in the manner described above is based, among other things, on Ampal continuing to be treated, for tax purposes, as a non-resident of Israel that is not doing business in Israel. As of January 1, 2006, a different withholding rate may apply.           Under Israeli law, Israeli tax residents are taxed on capital gains generated from sources in Israel or outside of Israel, whereas non residents are taxable only with respect to gains generated from sources in Israel. Gains are generally regarded as being from Israeli sources if arising from the sale of assets either located in Israel or which represent a right to assets located in Israel (including gains arising from the sale of shares of stock in companies resident in Israel, and of rights in non-resident entities that mainly represent ownership and rights to assets located in Israel, with regard to such assets). Under the Treaty, US tax residents are subject to Israeli capital gains tax on the sale of shares in Israeli companies, if they have held 10% or more of the voting rights in such company at any time during the 12 months immediately preceding the sale.   9             Since January 1, 1994, the portion of the gain attributable to inflationary differences prior to that date is taxable at a rate of 10%, while the portion of the gain attributable to inflationary differences between such date and the date of disposition of the asset is exempt from tax. Non-residents of Israel are exempt from the 10% tax on the inflationary gain derived from the sale of shares in companies that are considered Israeli tax residents if they elect to compute the inflationary portion of the gain based on the change in the rate of exchange between Israeli currency and the foreign currency in which the shares were purchased, rather than the change in the Israeli consumer price index(1). The remainder of the gain (“Real Capital Gain”), if any, is taxable to corporations at the rate of 25%. However, Real Capital Gains arising from the sale of capital assets that had been acquired prior to January 1, 2003 shall be apportioned on a linear basis to the periods before and after the same date, namely – the portion of the gain attributed to the period before January 1, 2003 shall be subject to tax at a rate equal to the corporate tax rate in affect at the time of the sale (in 2005 – 34%), whereas the portion of the gain attributed to the period after January 1, 2003 shall be taxed at the preferential rate of 25%. This 25% preferential tax rate may also apply to a certain portion of the profit upon the sale of Israeli shares.           Foreign corporations are generally exempt from tax on gains from the sale of shares in publicly traded companies. Amendment No. 147 introduces a broader exemption under domestic law for non-residents regardless of their percentage holding in an Israeli company (not holding real estate rights) to include capital gains from the sale of securities (even where not traded in Israel) ,which were purchased between July 1, 2005 through December 31, 2006, provided certain conditions are met.           The Income Tax Law (Adjustment for Inflation), 1985, which applies to companies which have business income in Israel or which claim a deduction in Israel for financing costs, has been in force since the 1985 tax year. The law provides for the preservation of equity, whereby certain corporate assets are classified broadly into Fixed (inflation resistant) and Non-Fixed (non-inflation resistant) Assets. Where shareholders’ equity, as defined therein, exceeds the depreciated cost of Fixed Assets, a tax deduction which takes into account the effect of the annual inflationary change on such excess is allowed, subject to certain limitations. Conversely, if the depreciated cost of Fixed Assets exceeds shareholders’ equity, then such excess, multiplied by the annual inflation change, is added to taxable income.           Individuals and companies in Israel pay VAT at a rate of 16.5% (17% until August 2005) of the price of assets sold and services rendered. However, according to a Temporary Order issued by the state of Israel the VAT rate was increased from 17% to 18% for the period commencing on June 15, 2002 and ending on December 31, 2003. This period was extended by an additional two months and was terminated on February 29, 2004, when the VAT rate was reduced back to 17%. In computing its VAT liability, Ampal’s Israeli subsidiaries are entitled to claim as a deduction input VAT it has incurred with respect to goods and services acquired for the purpose of the business.   United States Federal Taxation of Ampal           Ampal and its United States subsidiaries (in the following discussion, generally referred to collectively as “Ampal U.S.”) are subject to United States taxation on their taxable income, as computed on a consolidated basis, from domestic as well as foreign sources. The gross income of Ampal U.S. for United States tax purposes includes or may include (i) income earned directly by Ampal U.S., (ii) Ampal U.S.‘s pro rata share of certain types of income, primarily “subpart F income” earned by certain Controlled Foreign Corporations in which Ampal U.S. owns or is considered as owning 10 percent or more of the voting power; and (iii) Ampal U.S.‘s pro rata share of ordinary income and capital gains earned by certain Passive Foreign Investment Companies in which Ampal U.S. owns stock, and with respect to which Ampal has elected that such company be treated as a Qualified Electing Fund. Subpart F income includes, among other things, dividends, interest and certain rents and capital gains. Since 1993, the maximum rate applicable to domestic corporations is 35%.     (1)               Beginning January 1, 2006, the section of the Israeli Tax Ordinance under which           the regulations providing such tax exemption to non-Israeli residents were           promulgated, was rescinded. It is therefore unclear whether this exemption shall           continue to be applicable   10             Certain of Ampal’s non-U.S. subsidiaries have elected to be treated as partnerships for U.S. tax purposes. As a result, Ampal is generally subject to US tax on its distributive share of income earned by such subsidiaries (generally computed with reference to Ampal’s proportionate interest in such entity), as it is earned, i.e. – without regard to whether or not such income is distributed by the subsidiary. Certain of Ampal’s wholly-owned non-U.S. subsidiaries have elected to be treated as “disregarded entities” for U.S. federal tax consequences. As a result, Ampal is subject to US tax on all income earned by such subsidiaries, as it is earned.           Ampal U.S. is generally entitled to claim as a credit against its United States income tax liability all or a portion of income taxes, or of taxes imposed in lieu of income taxes, paid to foreign countries. If Ampal U.S. receives dividends from a non-US corporation in which it owns 10% or more of the voting stock, Ampal U.S. is treated (in determining the amount of foreign income taxes paid by Ampal U.S. for purposes of the foreign tax credit) as having paid the same proportion of the foreign corporation’s post-1986 foreign income taxes as the amount of such dividends bears to the foreign corporation’s post-1986 undistributed earnings.           In general, the total foreign tax credit that Ampal U.S. may claim is limited to the same proportion of Ampal U.S.‘s United States income taxes that its foreign source taxable income bears to its taxable income from all sources, US and non-US. This limitation is applied separately with respect to various items of income (“baskets”), which may further limit Ampal’s ability to claim foreign taxes as a credit against its U.S. tax liability. The use of foreign taxes as an offset against United States tax liability is further limited by certain rules pertaining to the sourcing of income and the allocation of deductions. As a result of the combined operation of these rules, it is possible that Ampal U.S. would exercise its right to elect to deduct the foreign taxes, in lieu of claiming such taxes as a foreign tax credit.           Ampal U.S. may also be subject to the alternative minimum tax (“AMT”) on corporations. Generally, the tax base for the AMT on corporations is the taxpayer’s taxable income increased or decreased by certain adjustments and tax preferences for the year. The resulting amount, called alternative minimum taxable income, is then reduced by an exemption amount and subject to tax at a 20% rate. As with the regular tax computation, AMT can be offset by foreign tax credits as well as net operating losers (“NOLs”) both of which are separately calculated under AMT rules and both of which are generally limited to 90% of AMT liability as specially computed for this purpose. The 90% limitation of the foreign tax credit allowed against AMT was repealed in the Jobs Creation Act of 2004, effective for tax years beginning after December 31, 2004.   FORWARD-LOOKING STATEMENTS           This Report (including but not limited to factors discussed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as those discussed elsewhere in this Report on Form 10-K) includes forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to the Company that are based on the beliefs of management of the Company as well as assumptions made by and information currently available to the management of the Company. When used in this Report, the words “anticipate,” “believe”, “estimate,” “expect,” “intend,” “plan,” and similar expressions, as they relate to the Company or the management of the Company, identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events or future financial performance of the Company, the outcome of which is subject to certain risks and other factors which could cause actual results to differ materially from those anticipated by the forward-looking statements, including among others, the economic and political conditions in Israel, the Middle East, including the situation in Iraq, and in the global business and economic conditions in the different sectors and markets where the Company’s portfolio companies operate. These risks and uncertainties include, but are not limited to, those described in Part I, “Item 1A. Risk Factors” and elsewhere in this report and those described from time to time in our future reports filed with the Securities and Exchange Commission.   11             Should any of those risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcome may vary from those described therein as anticipated, believed, estimated, expected, intended or planned. Subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere described in this Report and other Reports filed with the Securities and Exchange Commission.
An investment in our securities involves risks and uncertainties. These risks and uncertainties could cause our actual results to differ materially from our historical results or the results contemplated by any forward-looking statements contained in this report on Form 10-K or that we make in other filings with the SEC under the Securities and Exchange Act of 1934 or in other public statements. The risks described below are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. You should consider the following factors carefully, in addition to the other information contained in this Form 10-K, before deciding to purchase, sell or hold our securities:   Because most of the companies in which we invest conduct their principal operations in Israel, we may be adversely affected by the economic, political, social and military conditions in the Middle East.           Most of the companies in which we directly or indirectly invest conduct their principal operations in Israel. We may, therefore, be directly affected by economic, political, social and military conditions in the Middle East, including Israel’s relationship with the Palestinian Authority and Arab countries. In addition, many of the companies in which we invest are dependent upon materials imported from outside of Israel, including East Mediterranean Gas Company, an Egyptian joint stock company in which we own a 2% stake. We also have interests in companies that export significant amounts of products from Israel. Accordingly, our operations could be materially and adversely affected by acts of terrorism or if major hostilities should occur in the Middle East or trade between Israel and its present trading partners should be curtailed, including as a result of acts of terrorism in the United States. Any such effects may impact our value and the value of our investee companies.   The SEC may re-examine, suspend or modify our exemption from the Investment Company Act of 1940, as amended.           In 1947, the SEC granted us an exemption from the Investment Company Act of 1940, as amended (the “1940 Act”), pursuant to an exemptive order. The exemptive order was granted based upon the nature of our operations, the purposes for which we were organized, which have not changed, and the interest of purchasers of our securities in the economic development of Israel. There can be no assurance that the SEC will not re-examine the exemptive order and revoke, suspend or modify it. A revocation, suspension or material modification of the exemptive order could materially and adversely affect us unless we were able to obtain other appropriate exemptive relief. In the event that we become subject to the provisions of the 1940 Act, we could be required, among other matters, to make changes, which might be material, to our management, capital structure and methods of operation, including our dealings with principal shareholders and their related companies.   12     As most of our investee companies conduct business outside of the United States, we are exposed to foreign currency and other risks.           We are subject to the risks of doing business abroad, including, among other risks, foreign currency exchange rate risks, changes in interest rates, equity price changes of our investee companies, import restrictions, anti-dumping investigations, political or labor disturbances, expropriation and acts of war. No assurances can be given that we will be protected from future changes in foreign currency exchange rates that may impact our financial condition or performance.           Foreign securities or illiquid securities in our portfolio involve higher risk and may subject us to higher price volatility. Investing in securities of foreign issuers involves risks not associated with U.S. investments, including settlement risks, currency fluctuations, local withholding and other taxes, different financial reporting practices and regulatory standards, high costs of trading, changes in political conditions, expropriation, investment and repatriation restrictions, and settlement and custody risks.   Changes in accounting standards and taxation requirements could affect our financial results.           New accounting standards or pronouncements that may become applicable to the Company from time to time, or changes in the interpretation of existing standards and pronouncements, could have a significant effect on our reported results for the affected periods. We are also subject to income tax in the numerous jurisdictions in which we generate revenues. Increases in income tax rates could reduce our after-tax income from affected jurisdictions.    The loss of key executives could cause our business to suffer.           Yosef A. Maiman, our Chairman, and other key executives have been key to the success of our business to date. The loss or retirement of such key executives services could adversely affect us.   Y.M. Noy Investments Ltd.‘s control of us could discourage attempts to acquire us.           Y.M.           Noy Investments Ltd., an Israeli company held approximately 58.29% of the voting           power of our Class A Stock as of March 6, 2006. Yosef A. Maiman, the Chairman of           our board of directors, owns 100% of the economic shares and one-third of the           voting shares of Y.M. Noy Investments Ltd. In addition, Mr. Maiman holds an           option to acquire the remaining two-thirds of the voting shares of Y.M. Noy           Investments Ltd. (which are currently owned by Ohad Maiman and Noa Maiman, the           son and daughter, respectively, of Mr. Maiman). By virtue of its ownership of           Ampal, Y.M. Noy Investments Ltd. is able to control our affairs and to influence           the election of the members of our board of directors. Y.M. Noy Investments Ltd.           also has the ability to prevent or cause a change in control of Ampal.    Because we are a “controlled company,” we are exempt from complying with certain Nasdaq listing standards.           Because Y.M. Noy Investments Ltd. own more than 50% of our voting power, we are deemed to be a “controlled company” under the rules of the Nasdaq National Market. As a result, we are exempt from the Nasdaq rules that require listed companies to have (i) a majority of independent directors on the board of directors, (ii) a compensation committee and nominating committee composed solely of independent directors, (iii) the compensation of executive officers determined by a majority of the independent directors or a compensation committee composed solely of independent directors and (iv) a majority of the independent directors or a nominating committee composed solely of independent directors elect or recommend director nominees for selection by the board of directors. Accordingly, our directors who hold management positions or who are otherwise not independent have greater influence over our business and affairs.   13     Our activities could be restricted as a result of agreements between our controlling shareholder and its  lender.           Based upon statements of beneficial ownership filed with the SEC by Y.M. Noy Investments ltd., Yosef A. Maiman, Ohad Maiman and Noa Maiman, the repayment of the borrowed funds used to finance Y.M. Noy Investment’s Ltd.‘s acquisition of a controlling interest in us, consisting of 11,444,112 shares of our Class A Stock, was principally financed by Bank Leumi Le-Israel B.M. According to the statements of beneficial ownership, the repayment of the borrowings are guaranteed by a personal guarantee by Mr. Maiman and secured by Y.M. Noy Investment Ltd.‘s pledge of such shares of our Class A Stock to the bank.           The statements of beneficial ownership report that the pledge agreement with the bank includes restrictions on Y.M. Noy Investments Ltd.‘s voting rights and grants the bank certain voting rights with respect to the pledged shares, and that its credit agreement with the bank requires Y.M. Noy Investments Ltd. to maintain a controlling interest in us for so long as any amounts remain outstanding pursuant to the credit facilities. The statements of beneficial ownership also report that Y.M. Noy Investments Ltd. agreed that it will cause us to not issue any shares of our Class A Stock or options to acquire shares of our Class A Stock, except for employee stock options to our employees, consultants and directors and provided that Y.M. Noy Investments Ltd. owns at least 50.1% of Ampal. In addition, the statements of beneficial ownership reported that Y.M. Noy Investments Ltd. has agreed, unless it has received the prior consent of the bank and until the borrowings have been repaid in full, to cause us to refrain from making any decisions with regard to our winding-up, change in corporate structure, reorganization or merger. The statements of beneficial ownership also reported that Y.M. Noy Investments Ltd. has agreed, unless it has received the prior consent of the bank, not to sign any voting or other agreement regarding the shares and to oppose any change in our certificate of incorporation and by-laws and any resolution or other act which will or might result in the dilution of Y.M. Noy Investments Ltd.‘s interest in Ampal.   We do not typically pay cash dividends on our Class A Stock.           We have not paid a dividend on our Class A Stock other than in 1995. Past decisions not to pay cash dividends on Class A Stock reflected our policy to apply retained earnings, including funds realized from the disposition of holdings, to finance our business activities and to redeem debentures. The payment of cash dividends in the future will depend upon our operating results, cash flow, working capital requirements and other factors we deem pertinent.   The market price per share of our Class A Stock on Nasdaq fluctuates and has traded in the past at less than our book value per share.           Stock prices of companies, both domestically and abroad, are subject to fluctuations in trading price. Therefore, as with company like ours that invests in stocks of other companies, our book value and market price will fluctuate, especially in the short term. As of December 31, 2005, the market price on Nasdaq of $3.95 per share of our Class A Stock is less than our book value of $4.43 per share calculated in accordance with our consolidated financial statements. You may experience a decline in the value of your investment and you could lose money if you sell your shares at a price lower than you paid for them.   We do not publish the value of our assets.           It is our policy not to publish the value of our assets or our views on the conditions of or prospects for our investee companies. To the extent the value of our ownership interests in our investee companies were to experience declines in the future, our performance would be adversely impacted.   Our Class A Stock may not be liquid.           Our Class A Stock is currently traded on Nasdaq. The trading volume of our Class A Stock may be adversely affected due to the limited marketability of our Class A Stock as compared to other companies listed on Nasdaq. Accordingly, any substantial sales of our Class A Stock may result in a material reduction in price of our Class A Stock because relatively few buyers may be available to purchase our Class A Stock.   14
None.
Ampal’s corporate headquarters in Israel, which is owned by the Company, is located at 111 Arlozorov Street in Tel Aviv.           Ampal currently leases an office at 555 Madison Avenue in New York City from Rodney Company N.V., Inc. The lease period is seven years commencing on October 15, 2002. The annual rent for this lease is $119,794. On March 31, 2004, the Company closed this office. The office space has been subleased.           Country Club Kfar Saba Ltd. occupies a 7-1/4 acre lot in the town of Kfar Saba which will be leased for five consecutive ten-year periods, at the end of which the land returns to the lessor. The lease expires on July 14, 2038, and lease payments in 2005 totaled $179,619.           Other properties of the Company are discussed elsewhere in this Report. See “Item 1. Business.”
Ampal Communications L.P.       1.                  On May 10, 2004, Ampal Communications L.P., a limited partnership controlled by           Ampal and in which Ampal holds a 75% equity interest, filed a claim in the           Tel-Aviv District Court against Motorola Communications Israel Ltd., MIRS           Communications Ltd.(“MIRS”), Motorola Israel Ltd., Elisha Yanai, Peter           Brum, Rami Guzman, Nathan Gidron, and Shimon Tal (collectively, the           “Defendants”), for injunctive and declaratory relief as described           below. The claim is in connection with the exploitation by the defendants of           Ampal Communications’ minority rights by virtue of its 33% holding in MIRS.           Ampal Communications L.P. requested the Court to issue relief as follows:       A.                  Declaring that the business of MIRS is conducted in such a way as to be           prejudicial to the rights of Ampal Communications L.P. as a minority           shareholder;       B.                  Appointing an appraiser to conduct a valuation of MIRS and Ampal Communications           L.P.‘s holdings therein, which will encompass a review of the way MIRS           conducts its business, including a review of the related party transactions           between MIRS and Motorola Israel Ltd. and/or any other of the Defendants;       C.                  Instructing each of the Defendants to acquire and purchase from Ampal           Communications L.P. the shares it holds in MIRS at the highest of the following           prices:       (1)                  based on a company valuation of MIRS as presented to Ampal Communications L.P.           by Motorola prior to the signing of the Share Purchase Agreement for MIRS; or       (2)                  based on the amount paid by Ampal Communications L.P. for its share holding in           MIRS plus linkage to the Israeli consumer index and interest; or   15         (3)                  based on the company valuation that will be determined by the valuation           specified in Section B above, excluding any material negative effect brought           about by the Defendants’ omissions and/or negligence in their management of           MIRS, all as may be assessed and computed by the appraiser specified in Section           B above;       D.                  Determining that each of the individual Defendants, as officers in MIRS, has           violated his respective fiduciary obligations towards Ampal Communications L.P.           as a minority shareholder in MIRS; and       E.                  Declaring that the Share Purchase Agreement pursuant to which Ampal           Communications L.P. acquired its shareholding in MIRS and the Shareholders           Agreement in respect thereof, are void.       2.                  On May 24, 2004 and on May 31, 2004 the Defendants requested the district court           to strike out the claim in limine, on the grounds that Ampal had allegedly not           paid sufficient fees when filing the claim, and further requested an extension           of the time for filing statements of defense until after the district court had           reached a decision regarding the request to strike out the claim. Ampal and the           Defendants filed various responses and on June 30, 2004, the district court           requested the Attorney General to furnish an opinion regarding the           Defendants’ request before issuing its own decision. On October 11, 2004           the Attorney General furnished its opinion that supported the Defendants’           request that Ampal should pay the fees calculated on the basis of the value of           the requested remedies in the claim.           On November 10, 2004 Ampal filed its response. The Court also decided that the statements of defense should be filed 10 days after it issues its decision regarding the striking out of the claim.       3.                  On March 1, 2005, Ampal requested the district court to enter judgment against           Peter Brum on the grounds that he failed to file a defense to the Company’s           claim. On March 15, 2005, the district court granted Ampal’s request and           entered judgment against Peter Brum. On March 17, 2005, the district court           ordered Mr. Brum to acquire and purchase from Ampal the shares it holds in MIRS           for a total company valuation of $ 765,998,000, which is the highest of the           prices set forth in the complaint. The litigation with regard to the other           defendants is ongoing. Peter Brum, Motorola and MIRS have appealed the district           court’s judgment on numerous grounds. Ampal has filed responses to the           appeal.       4.                  On August 30, 2005, the Company, through Ampal Communications L.P. entered into           a Stock Purchase and Indemnification Agreement, dated as of August 30, 2005, by           and among Motorola Israel Ltd., Ampal Communications L.P. and MIRS (the           “Agreement”) to sell Motorola Israel Ltd. all of its holdings of MIRS.           In connection with the closing of the transactions contemplated by this           Agreement the existing lawsuit among the parties and other relating to MIRS was           dismissed.       5.                  On October 3, 2005 the Company, through Ampal Communications L.P., completed the           sale to Motorola Israel Ltd. of all of its holdings of MIRS pursuant to the           Agreement. In connection with the sale of its holdings of MIRS, Ampal           Communications L.P. received approximately US $89 million of total proceeds,           composed of $67.7 million for the purchase price and an additional $ 21.3           million related to guaranteed dividend payments. Approximately $ 74.0 million of           the proceeds was used to repay all outstanding debt to banks incurred in           connection with making the MIRS investment, and the Company received US$ 15.0           million ($11.0 million after the deduction of minority interest) of net proceeds           from the sale.           Galha           On January 1, 2002, Galha (1960) Ltd. (“Galha”) filed a suit against the Company and other parties, including directors of Paradise Industries Ltd. (“Paradise”) appointed by the Company, in the Tel Aviv District Court, in the amount of NIS 10,249,609 ($2.2 million). Galha claimed that the Company, which was a shareholder of Paradise, and another shareholder of Paradise, misused funds that were received by Paradise from an insurance company for the purpose of reconstructing an industrial building owned by Galha and used by Paradise which burnt down. Paradise is currently involved in liquidation proceedings. Ampal issued a guarantee in favor of Galha for the payment of an amount of up to NIS 4,022,085 ($873,800) if a final judgment against the Company will be given.   16             On May 26, 2003 the Company and the directors of Paradise appointed by the Company filed a third party claim against Arieh Israeli Insurance Company Ltd. in the Tel Aviv District Court claiming that, to the extent the court decides that the directors of Paradise appointed by the Company will have to pay any amounts to Galha, Arieh will pay such amounts on behalf of the directors in accordance with the Directors and Officers insurance policy that the Company had at that time with Arieh. Arieh filed a statement of defense and stated that the policy does not cover the claim. At this stage, the Company cannot estimate the impact this claim will have on it.           Claims Against Subsidiaries and Affiliates:           Legal claims arising in the normal course of business have been filed against subsidiaries and affiliates of the company. Based upon the opinions of legal counsel, the Company’s management believes that all provisions made are sufficient.
None.      17      PART II
PRICE RANGE OF CLASS A STOCK           Ampal’s Class A Stock is listed on Nasdaq under the symbol “AMPL”. The following table sets forth the high and low bid prices for the Class A Stock, by quarterly period for the fiscal years 2005 and 2004, as reported by Nasdaq and representing inter-dealer quotations which do not include retail markups, markdowns or commissions for each period, and each calendar quarter during the periods indicated. Such prices do not necessarily represent actual transactions.     High Low                  2005:               Fourth Quarter    4.05    2.80    Third Quarter    4.09    3.21    Second Quarter    4.29    3.52    First Quarter    4.38    3.61              2004:     Fourth Quarter    4.20    3.27    Third Quarter    3.70    2.65    Second Quarter    3.87    2.81    First Quarter    4.20    2.88              As of March 6, 2006, there were approximately 731 record holders of Class A Stock.   VOTING RIGHTS           Unless dividends on any outstanding preferred stock are in arrears for three successive years, as discussed below, the holders of Class A Stock are entitled to one vote per share on all matters voted upon. Notwithstanding the above, if dividends on any outstanding series of preferred stock are in arrears for three successive years, the holders of all outstanding series of preferred stock as to which dividends are in arrears shall have the exclusive right to vote for the election of directors until all cumulative dividend arrearages are paid. The shares of Class A Stock do not have cumulative voting rights in relation to the election of the Company’s directors, which means that any holder of at least 50% of the Class A Stock can elect all of the members of Board of Directors of Ampal (the “Board”).   DIVIDEND POLICY           Ampal has not paid a dividend on its Class A Stock other than in 1995. Past decisions not to pay cash dividends on Class A Stock reflected the policy of Ampal to apply retained earnings, including funds realized from the disposition of holdings, to finance its business activities and to redeem debentures. The payment of cash dividends in the future will depend upon the Company’s operating results, cash flow, working capital requirements and other factors deemed pertinent by the Board.   18             Dividends on all classes of Ampal’s shares of preferred stock are payable as a percentage of par value. The holders of Ampal’s presently authorized and issued 4% Preferred Stock and 6 1/2% Preferred Stock (each having a $5.00 par value) are entitled to receive cumulative dividends at the rates of 4% and 6 1/2% per annum, respectively, payable out of surplus or net earnings of Ampal before any dividends are paid on the Class A Stock. If Ampal fails to pay such dividend to the preferred stockholders in any calendar year, such deficiency must be paid in full, without interest, before any dividends may be paid on the Class A Stock. If, after the payment of all cumulative dividends on the preferred stock and a non-cumulative 4% dividend on the Class A Stock, there remains any surplus, any dividends declared are to be participated in by the holders of 4% Preferred Stock and Class A Stock, pro rata. On December 18, 2005, Ampal announced that its Board had declared cash dividends on its classes of preferred stock ($0.325 per share on its 6 1/2% classes of preferred stock and $0.20 per share on its 4% Preferred Stock). The dividends were paid on December 30, 2005.           For equity compensation plan information required Item 2.01(d) of Regulation S-K, please see Item 12 below.
Fiscal year ended December 31,  FISCAL YEAR ENDED DECEMBER 31, 2005 2004 2003 2002 2001   (U.S. Dollars in thousands, except per share data)                 Revenues     $   30,530   $   31,464   $   51,814   $   16,732   $   29,062         Net income (loss)   $   (5,958 ) $  (18,385 ) $    8,847   $  (44,047 ) $   (6,974 )  Earnings (loss) per Class A Share(1):       Basic EPS   $    (0.31 ) $    (0.94 ) $     0.42   $    (2.27 ) $    (0.38 )      Diluted EPS   $    (0.31 ) $    (0.94 ) $     0.40   $    (2.27 ) $    (0.38 )  Total assets   $  210,904   $  304,947   $  354,367   $  323,699   $  383,833         Notes and loans and debentures Payable    50,366    120,796    138,334    136,803    145,901        (1)                       Computation is based on net income (loss) after deduction of preferred stock                     dividends (in thousands) of $191, $200, $213, $218 and $227 for the years ended                     2005, 2004, 2003, 2002 and 2001, respectively.
OVERVIEW           We seek to maximize shareholder value through acquiring and investing in companies that we consider have the potential for growth. In utilizing our core competencies and financial resources, our investment portfolio primarily focuses on a broad cross-section of Israeli companies engaged in various market segments including Energy, Real Estate, Project Development and Leisure Time.           Our investment focus is primarily on companies or ventures where we can exercise significant influence, on our own or with investment partners, and use our management experience to enhance those investments. We are also monitoring investment opportunities, both in Israel and abroad, that we believe will strengthen and diversify our portfolio and maximize the value of our capital stock. In determining whether to acquire an interest in a specific company, we consider the quality of management, return on investment, growth potential, projected cash flow, investment size and financing, and reputable investment partners. We also provide our investee companies with ongoing support through our involvement in the investee companies’ strategic decisions and introductions to the financial community, investment bankers and other potential investors both in and outside of Israel.   19             Our results of operations are directly affected by the results of operations of our investee companies. A comparison of the financial statements from year to year must be considered in light of our acquisitions and dispositions during each period.           The results of investee companies which are greater than 50% owned by us are included in the consolidated financial statements. We account for our holdings in investee companies over which we exercise significant influence, generally 20% to 50% owned companies (“affiliates”), under the equity method. Under the equity method, we recognize our proportionate share of such companies’ income or loss based on its percentage of direct and indirect equity interests in earnings or losses of those companies. The results of operations are affected by capital transactions of the affiliates. Thus, the issuance of shares by an affiliate at a price per share above our carrying value per share for such affiliate results in our recognizing income for the period in which such issuance is made, while the issuance of shares by such affiliate at a price per share that is below our carrying value per share for such affiliate results in our recognizing a loss for the period in which such issuance is made. We account for our holdings in investee companies, other than those described above, on the cost method or in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. In addition, we review investments accounted for under the cost method and those accounted for under the equity method periodically in order to determine whether to maintain the current carrying value or to write off some or all of the investment. For more information as to how we make these determinations, see “Critical Accounting Policies.”           For those subsidiaries and affiliates whose functional currency is considered to be the New Israeli Shekel (“NIS”), assets and liabilities are translated at the rate of exchange at the end of the reporting period and revenues and expenses are translated at the average rates of exchange during the reporting period. Translation differences of those foreign companies’ financial statements are included in the cumulative translation adjustment account (reflected in accumulated other comprehensive loss) of shareholders’ equity. Should the NIS be devalued against the U.S. dollar, cumulative translation adjustments are likely to result in a reduction in shareholders’ equity. As of December 31, 2005, the accumulated effect on shareholders’ equity was a decrease of approximately $19.7 million. Upon disposition of an investment, the related cumulative translation adjustment balance will be recognized in determining gains or losses.   CRITICAL ACCOUNTING POLICIES           The preparation of Ampal’s consolidated financial statements is in conformity with accounting principles generally accepted in the United States which requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. Actual results may differ from these estimates. To facilitate the understanding of Ampal’s business activities, described below are certain Ampal accounting policies that are relatively more important to the portrayal of its financial condition and results of operations and that require management’s subjective judgments. Ampal bases its judgments on its experience and various other assumptions that it believes to be reasonable under the circumstances. Please refer to Note 1 to Ampal’s consolidated financial statements included in this Annual Report for the fiscal year ended December 31, 2005 for a summary of all of Ampal’s significant accounting policies.   20             Portfolio Investments           The Company accounts for a number of its investments, including many of its investments in the high-technology and communications industries, on the basis of the cost method. Application of this method requires the Company to periodically review these investments in order to determine whether to maintain the current carrying value or to write off some or all of the investment. While the Company uses some objective measurements in its review, such as the portfolio company’s liquidity, burn rate, termination of a substantial number of employees, achievement of milestones set forth in its business plan or projections and seeks to obtain relevant information from the company under review, the review process involves a number of judgments on the part of the Company’s management. These judgments include assessments of the likelihood of the company under review to obtain additional financing, to achieve future milestones, make sales and to compete effectively in its markets. In making these judgments the Company must also attempt to anticipate trends in the particular company’s industry as well as in the general economy. There can be no guarantee that the Company will be accurate in its assessments and judgments. To the extent that the Company is not correct in its conclusion it may decide to write down all or part of the particular investment.           Investment in MIRS           Our investment in MIRS, which we sold on October 3, 2005, was accounted for at cost (our equity interest was 25%). The cost method was applied due to preference features we were granted in our investment in preferred shares in MIRS. Revenues from guaranteed dividend payments from Motorola were recognized as income. We performed annual tests for impairment regarding our investment in MIRS. Our assessment of our investment in MIRS as of December 31, 2005, resulted in an impairment charge of $13.3 million (see also, Item 1 “Business”, “Results of Operations” and “Debt” below and Note 2 to the Consolidated Financial Statements).           Marketable Securities           We determine the appropriate classification of marketable securities at the time of purchase. We hold marketable securities classified as trading securities that are carried at fair value, and marketable securities classified as available-for-sale that are carried at fair value with unrealized gains and losses included in the component of accumulated other comprehensive loss in stockholders’ equity. We classify investment in marketable securities as investment in trading securities, if those securities are bought and held principally for the purpose of selling them in the near term (held for only a short period of time). All the other securities are classified as available for sale securities.           Statement of Financial Accounting Standards (“SFAS”) 115, Accounting for Certain Investments in Debt and Equity Securities, and Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 59, Accounting for Noncurrent Marketable Equity Securities, provides guidance on determining when an investment is other-than-temporarily impaired. Investments are reviewed quarterly for indicators of other-than-temporary impairment. This determination requires significant judgment. In making this judgment, we evaluate, among other factors, the duration and extent to which the fair value of an investment is less than its cost; the financial health of the investee; and our intent and ability to hold the investment. Investments with an indicator are further evaluated to determine the likelihood of a significant adverse effect on the fair value and amount of the impairment as necessary. If market, industry and/or investee conditions deteriorate, we may incur future impairments.           Long- lived assets           On January 1, 2002, Ampal adopted SFAS 144, “Accounting for the Impairment or Disposal of LongLived Assets.” SFAS 144 requires that long- lived assets, to be held and used by an entity, be reviewed for impairment and, if necessary, written down to the estimated fair values, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through undiscounted future cash flows.   21             Accounting for Income Taxes           As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. A valuation allowance is currently set against certain tax assets because management believes it is more likely than not that these deferred tax assets will not be realized through the generation of future taxable income. We also do not provide for taxes on undistributed earnings of our foreign subsidiaries, as it is our intention to reinvest undistributed earnings indefinitely outside the United States. In 2005, there were no undistributed earnings from foreign subsidiaries.           Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and our future taxable income for purposes of assessing our ability to realize any future benefit from our deferred tax assets. In the event that actual results differ from these estimates or we adjust these estimates in future periods, our operating results and financial position could be materially affected.   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS   FAS 123 (Revised 2004) Share-based Payment           In December 2004, the Financial Accounting Standards Board (“FASB”) issued the revised Statement of Financial Accounting Standards (“FAS”) No. 123, Share-Based Payment (FAS 123R), which addresses the accounting for share-based payment transactions in which the Company obtains employee services in exchange for (a) equity instruments of the Company or (b) liabilities that are based on the fair value of the Company’s equity instruments or that may be settled by the issuance of such equity instruments. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SEC’s interpretation of FAS 123R.           FAS 123R eliminates the ability to account for employee share-based payment transactions using APB Opinion No. 25 – “Accounting for Stock Issued to Employees”, and requires instead that such transactions be accounted for using the grant-date fair value based method. This Statement will be effective as of the beginning of the first interim period after June 15, 2005 (January 1, 2006 for the Company). Early adoption of FAS 123R is encouraged. This Statement applies to all awards granted or modified after the Statement’s effective date. In addition, compensation cost for the unvested portion of previously granted awards that remain outstanding on the Statement’s effective date shall be recognized on or after the effective date, as the related services are rendered, based on the awards’ grantdate fair value as previously calculated for the pro-forma disclosure under FAS 123.           The Company estimates that the cumulative effect of adopting FAS 123R, as of its adoption date by the Company (January 1, 2006), based on the awards outstanding as of December 31, 2005, will not be material. This estimate does not include the impact of additional awards, which may be granted, or forfeitures, which may occur subsequent to December 31, 2005 and prior to the adoption of FAS 123R.           The Company expects that upon the adoption of FAS 123R, the Company will apply the modified prospective application transition method, as permitted by the Statement. Under such transition method, upon the adoption of FAS 123R, the Company’s financial statements for periods prior to the effective date of the Statement will not be restated.           The Company expects, based on the awards outstanding as of December 31, 2005, that this statement will have an estimated effect of $0.8 million on it’s financial position and results of operations in 2006.   22     FAS 154 - Accounting  Changes and Error  Corrections - a replacement  of APB Opinion No. 20 and FASB  Statement No. 3           In June 2005, the Financial Accounting Standards Board issued FAS No. 154,“Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No.3". This Statement generally requires retrospective application to prior periods’ financial statements of changes in accounting principle. Previously, Opinion No. 20 required that most voluntary changes in accounting principle were recognized by including the cumulative effect of changing to the new accounting principle in net income of the period of the change. FAS 154 applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. This Statement shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 (2006 for the Company). We do not expect the adoption of this statement will have a material impact on our results of operations, financial position or cash flow.   RESULTS OF OPERATIONS   Fiscal year ended December 31, 2005 compared to fiscal year ended December 31, 2004:           The Company recorded a consolidated net loss of $6.0 million for the fiscal year ended December 31, 2005, as compared to $18.4 million loss for the same period in 2004. The decrease in net loss is primarily attributable to an increase in earnings of affiliates, an increase in interest income and a decrease in loss from impairment of investments. The decrease in net loss was partially offset by a decrease in realized and unrealized gains from marketable securities and investments and an increase in translation losses in 2005, as compared to 2004.           Income from equity of affiliates increased to $6.7 million for the fiscal year ended December 31, 2005 as compared to $4.0 million for the fiscal year ended in 2004. The increase is primarily attributable to a $6.6 million gain recorded by Ophir Holding Ltd. as a result of the sale of all its holdings in Industrial Building Corporation Ltd.           In the fiscal year ended December 31, 2005, the Company recorded $14.0 million in losses from the impairment of its investments and loans relating primarily to MIRS ($13.3 million) and Shiron Satelite Communications (1996) Ltd. (“Shiron Ltd.”) ($0.6 million). On October 3, 2005, the Company, through Ampal Communications L.P., a limited partnership controlled by the Company, completed the previously announced sale to Motorola Israel Ltd. of all of its holdings of MIRS pursuant to the terms of a Stock Purchase and Indemnification Agreement, dated as of August 30, 2005, by and among Motorola Israel, Ampal Communications L.P. and MIRS. In connection with the sale of its holdings of MIRS, Ampal Communications L.P. received approximately US $89 million of total proceeds, composed of $67.7 million for the purchase price and an additional $ 21.3 million related to guaranteed dividend payments. In the fiscal year ended December 31, 2004, the Company recorded $38.8 million in losses from the impairment of its investments and loans which was comprised primarily of the following losses: MIRS ($30.0 million), ShellCase ($3.8 million) and Star Management ($1.6 million).           During the fiscal year ended December 31, 2005, Ampal recorded $2.7 million of realized losses on investments, as compared to $6.0 million of realized gains in the same period in 2004. The loss recorded in 2005 was primarily attributable to the third-party investment in the high-tech portfolio (which is treated as a disposition for accounting purposes) which resulted in a $7.3 million loss ($4.6 net loss after tax). This loss was partially offset by the gain recorded from the sale of all of Ampal’s shares of Modem Art Ltd. ($3.3 million gain) and the sale of all of its shares in Epsilon investment ($1.4 million gain). The $6.0 million gain recorded in 2004 is mainly attributable to the sale of PowerDsine Ltd. and the sale of assets by PSINet Europe, one of the holdings of Ampal’s investee company, Telecom Partners (“TP”).   23             The Company recorded realized and unrealized gains from marketable securities in the amount of $3.2 million in the year 2005 as compared to $1.9 million in 2004.           The increase in real estate income and expenses in 2005 as compared to 2004 is primarily attributable to the increase in the tenant occupancy rate in Am-Hal Ltd.           Other income realized by the Company is principally composed of guaranteed dividend payments from Motorola equal to $7.1 million for the years ended December 31, 2005, and December 31, 2004.           The Company recorded higher interest income in the fiscal year ended December 31, 2005, as compared to the same period in 2004, primarily as a result of a $0.7 million gain from forward contracts to purchase U.S. Dollars and increases in interest rates.           The Company recorded an interest expense of $5.3 million in the fiscal year ended December 31, 2005, as compared to $4.9 million in the same period in 2004, primarily as a result of increases in applicable interest rates.           The management of the Company currently believes that inflation has not had a material impact on the Company’s operations.    SELECTED QUARTERLY FINANCIAL DATA     First Quarter Second Quarter Third Quarter Fourth Quarter   (U.S. Dollars in thousands, except per share data)   Unaudited                Fiscal Year Ended December 31, 2005                      Revenues   $  15,634   $   5,827   $   7,907   $   1,162    Net interest expense    (1,017 )  (1,439 )  (1,143 )  (91 )  Net (loss) income    6,728    (2,511 )  (10,630 )  455    Basic EPS:       Earnings (Loss) per Class A share(1)    0.33    (0.13 )  (0.53 )  0.02    Diluted EPS:       Earnings (Loss) per Class A share    0.30    (0.13 )  (0.53 )  0.02          First Quarter Second Quarter Third Quarter Fourth Quarter   (U.S. Dollars in thousands, except per share data)   Unaudited        Fiscal Year Ended December 31, 2004    Revenues   $   7,469   $   8,181   $   8,912   $   6,902    Net interest expense    (715 )  (1,236 )  (2,117 )  (222 )  Net (loss) income    (811 )  284    (2,545 )  (15,313 )  Basic EPS:    Earning (Loss) per Class A share(1)    (0.04 )  0.01    (0.13 )  (0.78 )  Diluted EPS:    Earning (Loss) per Class A share    (0.04 )  0.01    (0.13 )  (0.78 )        (1)  After  deduction of dividends on the 4% and 6 1/2% Cumulative Convertible Preferred Stock in 2005 and 2004 (in thousands) of $191 and $200, respectively.     See note 17 to the Company Consolidated Annual Statements which describe management decision to correct the disclosure provided by the Statements of Comprehensive Income (Loss) contained in the Company’s periodic reports on Form 10-Q for the three months ending March 31, 2005, six months ending June 30, 2005 and nine months ending September 30, 2005.   Fiscal year ended December 31, 2004 compared to fiscal year ended December 31, 2003:           The Company recorded a consolidated net loss of $18.4 million for the fiscal year ended December 31, 2004, as compared to $8.8 million gain for the same period in 2003. The decrease in net income is primarily attributable to the increase in losses from impairment of investments and decreases in realized and unrealized gain on investments in marketable securities. The decrease was partially offset by higher income from equity in and translation gains, 2004, as compared to 2003.   24             In the fiscal year ended December 31, 2004, the Company recorded $38.8 million in losses from the impairment of its investments and loans which was comprised primarily of the following losses: MIRS ($30.0 million), ShellCase ($3.8 million) and Star Management ($1.6 million). In the fiscal year ended December 31, 2003, the Company recorded $13.1 million in losses from the impairment of its investments and loans which was comprised primarily of the following losses: XACCT ($9.0 million), Carmel ($2.0 million) and Identify ($1.3 million).           During the fiscal year ended December 31, 2004, Ampal recorded $7.9 million of realized and unrealized gains on investments, as compared to $29.8 million of realized and unrealized gains in the same period in 2003. The gains recorded in 2004 are mainly attributable to the sale of assets by PSINet Europe, one of the holdings of Ampal’s investee company, Telecom Partners (“TP”)($2.5 million), (see “Investments”) and approximately 49% of the Company’s holdings in PowerDsine Ltd. (“PowerDsine”) ($3.5 million). The remaining shares of PowerDsine were treated as “available-for-sale” and $2.9 million were recorded as unrealized gains on marketable securities under, “Accumulated Other Comprehensive Loss.” The realized and unrealized gains on investments in 2003 were primarily attributable to the gains on the sale of the Company’s investment in Granite Hacarmel Investments Ltd. (“Granite”) ($20.7 million), Blue Square Israel Ltd. (“Blue Square”) ($2.6 million), Alvarion ($1.4 million), and mutual funds and other securities ($5.1 million).           During 2003, the Company reduced its holding interest in Granite from 20.4% to 10.5% as a result of a sale of 9.9%. Consequently, the Company’s investment in Granite, which was previously accounted for by the equity method, was accounted for as an investment in a trading marketable security. The remaining 10.5% interest in Granite was sold in February 2004.           Equity in earnings of affiliates increased to $4.0 million for the fiscal year ended December 31, 2004 as compared to $2.5 million for the fiscal year ended in 2003. In 2003, a loss of $1.7 million was recorded during the first quarter with respect to the Company’s holdings in Granite.           The increase in real estate income and expenses in 2004 as compared to 2003 is primarily attributable to the increase in the tenant occupancy rate in Am-Hal Ltd.           Other income realized by the Company is principally composed of guaranteed dividend payments from Motorola equal to $7.1 million for the years ended December 31, 2004 and 2003.           The Company recorded lower interest expense in the fiscal year ended December 31, 2004, as compared to the same period in 2003, primarily as a result of repayment of loans.           In the fiscal year ended December 31, 2004, Ampal recorded $10.2 million of tax benefit which related mainly to the loss from the impairment in our investment in Mirs.   LIQUIDITY AND CAPITAL RESOURCES           Cash Flows           On December 31, 2005, cash, cash equivalents and marketable securities were $62.9 million, as compared with $68.1 million at December 31, 2004.   25             The Company has sources of cash from operations, cash from investing activities and amounts available under credit facilities, as described below. The Company believes that these sources are sufficient to fund the current requirements of operations, capital expenditures, investing activities, dividends on preferred stock and other financial commitments of the Company for the next 12 months. However, to the extent that contingencies and payment obligations described below and in other parts of this Report require the Company to make unanticipated payments, the Company would need to further utilize these sources of cash. In the event of a decline in the market price of its marketable securities, the Company may need to draw upon its other sources of cash, which may include additional borrowing, refinancing of its existing indebtedness or liquidating other assets, the value of which may also decline.           In addition, the shares of Ophir Holdings Ltd. and government debenture notes equal to $9 million have already been pledged as security for various loans provided to the Company for the purchase of these shares and would therefore be unavailable if the Company wished to pledge them in order to provide an additional source of cash.           Cash flows from operating activities           Net cash provided by operating activities totaled approximately $43.2 million for the fiscal year ended December 31, 2005, as compared to approximately $13.1 million provided by the same period in 2004. The change is primarily attributable to (i) the $19.7 million net proceeds from the sale of securities ($32.6 million proceeds offset by $12.9 million invested) as compared to $23.0 million net proceeds from the sale of securities in 2004, (ii) receipt of a $21.3 million dividend from MIRS as part of the sale of MIRS to Motorola Communication Israel Ltd. and (iii) the $4.3 million in dividend payments received from affiliates as compared to $3.3 million in dividend payments received from affiliates in 2004.           Cash flows from investing activities           Net cash provided by investing activities totaled approximately $36.7 million for the fiscal year ended December 31, 2005, as compared to approximately $17.7 million provided by for the same period in 2004. The cash provided by investing activities is primarily attributable to the proceeds in the amount of $75.4 million from the disposition of MIRS, High-Tech Portfolio, Epsilon Group, Xpert, Modem Art and certain assets of TP. The cash receipts were offset by our approximately $30 million investment in EMG and a payment of $9.8 million by Am-Hal Ltd. (“Am-Hal”), a wholly owned subsidiary of the Company, to acquire and develop real estate for a new project in Tel-Aviv.           Cash flows from financing activities           Net cash used in financing activities was approximately $73.5 million for the fiscal year ended December 31, 2005, as compared to approximately $19.1 million of net cash used in financing activities for the fiscal year ended December 31, 2004.           The increase in cash used in financing activities is primarily attributable to the repayment in full of the $73.1 million loan which was received from Bank Hapoalim Ltd and Bank Leumi Le-Israel Ltd relating to the MIRS investment, the repayment of $2.5 million of loans by Am-Hal and Ampal which used its own cash to pay down its existing notes payable and debentures in the amount of $5.3 million. Those effects were offset by Am-Hal Ltd. and its minority partner in the new project which borrowed $8.8 million to finance the new project (see cash flow from investing activities). In 2004, the Company paid down its notes payable and debentures in the amount of $18.9 million with cash on hand and by borrowing funds in the amount of $6.5 million.           Investments           On December 31, 2005, the aggregate fair value of trading and available-for-sale securities were approximately $38.6 million, as compared to $50.4 million at December 31, 2004. The decrease in 2005 is attributable to the sale of tradable securities in order to finance the $30 million investment in EMG.   26       a)   In 2005, the Company made the following investments:          1.  On December 1, 2005, the Company acquired a 2.0% interest in EMG from Merhav           for $29,960,000. EMG is an Egyptian joint stock company organized in accordance           with the Egyptian Special Free Zones system which has been given the right to           export natural gas from Egypt to Israel and other locations in the East           Mediterranean basin and other countries. (See also Item 7. Related Party           Transaction).          2.  An additional investment of $0.7 million in Fimi Opportunity Fund, L.P.           (“Fimi”).        b)  In 2005, the Company made the following dispositions:          1.  On October 3, 2005 the Company, through Ampal Communications L.P., completed           the sale to Motorola Israel Ltd. of all of its holdings of MIRS. In connection           with the sale of its holdings of MIRS, Ampal Communications L.P. received           approximately US $89 million of total proceeds, composed of US $67.7 million for           the purchase price and an additional US $21.3 million related to guaranteed           dividend payments.          2.  During the third and fourth quarter of 2005, one of the holdings of           Ampal’s investee companies, TP received proceeds in the amount of $1.1           million from the sale of all its assets in Grapes Communications N.V./S.A. and           from the disposition of its holdings in PSINet Europe B.V.          3.  On September 7, 2005 a third-party Israeli based venture fund and certain of           its affiliated companies invested $2.65 million in the Company’s high-tech           and communications portfolio. Ampal received $2.5 million in connection with           this transaction. The Company treated this investment as a disposition for           accounting purposes and recorded a loss of $7.3 million ($4.6 million after           taxes).          4.  On August 15, 2005 the Company sold its holdings in Epsilon Investment House           Ltd. and Renaissance Investment Company Ltd. for $2.0 million and recorded a           $1.4 million gain.          5.  On July 11, 2005, the Company sold its holdings in Xpert Ltd. for $0.8 million           and recorded a loss of $0.2 million.          6.  On March 8, 2005, the Company sold its holdings in Modem Art Ltd. for $4.4           million and recorded a gain of $3.3 million.              Related Party transaction           On December 1, 2005, the Company acquired an interest in EMG from Merhav. EMG is an Egyptian joint stock company organized in accordance with the Egyptian Special Free Zones system which has been given the right to export natural gas from Egypt to Israel and other locations in the East Mediterranean basin and other countries. Egyptian natural gas shall reach the Israeli market via an underwater pipeline owned by EMG, which EMG expects to be completed during 2007. Under the terms of the transaction, the Company acquired a 2% beneficial ownership in EMG for a purchase price of $29,960,000. Additionally, the Company was granted the exclusive right to negotiate to acquire a substantial portion of Merhav’s remaining shares of EMG. The Company also has the right for a period of time to require Merhav to repurchase the EMG interest.           Yosef A. Maiman, the chairman of the Company’s Board of Directors and the Company’s controlling shareholder, is the sole owner of Merhav. The transaction was approved by a special committee of the Board of Directors composed of the Company’s independent directors. Houlihan Lokey Howard & Zukin Financial Advisors, Inc. acted as financial advisors to the special committee.   27             Debt           Notes and loans payable consist primarily of bank borrowings either in U.S. dollars, linked to the Consumer Price Index in Israel or in unlinked Israel Shekels, with interest rates varying depending upon their linkage provision and mature between 2006-2010.           The Company financed a portion of the $9.8 million real estate acquisition by Am-Hal, a wholly-owned subsidiary of the Company, which develops and operates luxury retirement centers for senior citizens, through a revolving credit facility from Hapoalim, Phoenix Insurance Company and others. On December 1, 2005, a loan agreement creating the facility was signed between Am-Hal, Phoenix Insurance Company and others. Pursuant to the loan agreement, the lenders granted the Company a revolving credit facility in Israeli Shekels equal to $12.5 million. The annual interest rate on the loan, which matures in 10 years, is 7.5%. The interest rate and the principal of the loan will be adjusted based on the changes in the Israeli Consumer Price Index. As of December 31, 2005 the Company had drawn $2.5 million from the facility. As of December 31, 2005 and December 31, 2004 the amounts outstanding under these loans were $13.5 million and $7.7 million, respectively. The loans, excluding the Phoenix loan, mature in up to one year and have interest rates range between 5.4% and 7.5%. The Company generally repays these loans with the proceeds received from deposits and other payments from the apartments in Am-Hal facilities. The loans are secured by a lien on Am-Hal’s properties. The Company also issued guarantees in the amount of $3.6 million in favor of tenants of Am-Hal in order to secure their deposits.            The Company also finances its general operations and other financial commitments through bank loans with Hapoalim. The long-term loans in the amount of $31.3 million mature through 2006-2010.           Other long term borrowings in the amount of $1.9 million are linked to the Israeli C.P.I and mature between 2006 and 2010 of which an amount of $1.4 million bears no interest. The remaining $0.5 million bears an annual interest of 5.7%.           The weighted average interest rates on the balances of short-term borrowings at year-end are as follows: 6.0% on $15.0 million and 3.5% on $13.0 million in 2005 and 2004, respectively.     Payments due by period (in thousands)  Contractual Obligations Total Less than 1 year 1  - 3 years 3-5 years More than 5 years                        Long-Term Debt     $ 35,406   $ 10,443   $ 12,412   $  9,521   $  3,030    Short-Term Debt   $ 14,960   $ 14,960                   Capital Call Obligation(1)   $  2,800   $  2,800                   Operating Lease (2)  Obligation   $  6,300   $    300   $    600   $    500   $  4,900    Capital Lease Obligation    --    --    --    --    --    Purchase Obligations    --    --    --    --    --    Other Long-Term Liabilities Reflected    on the Company's Balance Sheet    Under GAAP    --    --    --    --    --    Total   $ 59,466   $ 28,503   $ 13,012   $ 10,021   $  7,930               (1)  See note 15(d)        (2)  See note 15(a)      28             As of December 31, 2005, the Company had issued guarantees on certain outstanding loans to its investees and subsidiaries in the aggregate principal amount of $10.3 million. This includes:       1.  $5.8 million guarantee on indebtedness incurred by Bay Heart ($3.5 million of                which is recorded as a liability in the Company’s financial statements at                December 31, 2005) in connection with the development of its property. Bay Heart                recorded losses in 2005 as a result of decreased rental revenues. There can be                no guarantee that Bay Heart will become profitable or that it will generate                sufficient cash to repay its outstanding indebtedness without relying on the                Company’s guarantee.           2.  $3.6 million guarantee to Am- Hal tenants as described above.           3.  $0.9 million guarantee to Galha 1960 Ltd. as described in Item 3 of this Report.               In each of 2005 and 2004, Ampal paid dividends in the amount of $0.20 and $0.325 per share on its 4% and 6 ½% Cumulative Convertible Preferred Stocks, respectively. Total dividends paid in each year amounted to approximately $0.2 million.           Off-Balance Sheet Arrangements           Other than the foreign currency contracts specified below, the Company has no off-balance sheet arrangements.           Foreign Currency Contracts           The Company’s derivative financial instruments consist of foreign currency forward exchange contracts to purchase or sell US Dollars. These contracts are utilized by the Company, from time to time, to manage risk exposure to movements in foreign exchange rates. None of these contracts have been designated as hedging instruments. These contracts are recognized as assets or liabilities on the balance sheet at their fair value, which is the estimated amount at which they could be settled based on market prices or dealer quotes, where available, or based on pricing models. Changes in fair value are recognized currently in earnings.           As of December 31, 2005, the Company did not have any open foreign currency forward exchange contracts to purchase or sell U.S. Dollars.
MARKET RISKS AND SENSITIVITY ANALYSIS           The Company is exposed to various market risks, including changes in interest rates, foreign currency rates and equity price changes. The following analysis presents the hypothetical loss in earnings, cash flows and fair values of the financial instruments which were held by the Company at December 31, 2005, and are sensitive to the above market risks.           During the fiscal year ended December 31, 2005, there have been no material changes in the market risk exposures facing the Company as compared to those the Company faced in the fiscal year ended December 31, 2004.   29     Interest Rate Risks           At December 31, 2005, the Company had financial assets totaling $21.4 million and financial liabilities totaling $50.4 million. For fixed rate financial instruments, interest rate changes affect the fair market value but do not impact earnings or cash flows. Conversely, for variable rate financial instruments, interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant.           At December 31, 2005, the Company had fixed rate financial assets of $0.3 million and had variable rate financial assets of $21.1 million.  A ten percent decrease in interest rates would increase the unrealized fair value of the fixed rate assets by approximately $0.1 million.           At December 31, 2005, the Company had fixed rate debt of $5.0 million and variable rate debt of $45.4 million. A ten percent decrease in interest rates would increase the unrealized fair value of the financial debts in the form of the fixed rate debt by approximately $0.1 million.           The net decrease in earnings for the next year resulting from a ten percent interest rate increase would be approximately $0.2 million, holding other variables constant.   Exchange Rate Sensitivity Analysis           The Company’s exchange rate exposure on its financial instruments results from its investments and ongoing operations in Israel. During 2005, the Company entered into various foreign exchange forward purchase contracts to partially hedge this exposure. At December 31, 2005, the Company didn’t have any open foreign exchange forward purchase contracts. Holding other variables constant, if there were a ten percent devaluation of the foreign currency, the Company’s cumulative translation loss reflected in the Company’s accumulated other comprehensive loss would increase by $1.2 million, and regarding the statements of income loss a ten percent devaluation of the foreign currency would be reflected in a net decrease in earnings and would be $2.0 million.   Equity Price Risk           The Company’s investments at December 31, 2005, included marketable securities which are recorded at fair value of $38.6 million, including a net unrealized gain of $0.4 million. Those securities have exposure to price risk. The estimated potential loss in fair value resulting from a hypothetical ten percent decrease in prices quoted on stock exchanges is approximately $3.9 million.   30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   To the Board of Directors and Shareholders of  Ampal-American Israel Corporation:   We have audited the accompanying consolidated balance sheets of Ampal-American Israel Corporation and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of income (loss), cash flows, changes in shareholders’ equity, and comprehensive income (loss) for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.   We did not audit the financial statements of certain subsidiaries, whose revenues included in consolidation constitute approximately 14.5% of total consolidated revenues for the year ended December 31, 2003. Also we did not audit the financial statements of certain affiliated companies, the company’s interest in which as reflected in the balance sheets as of December 31, 2005 and 2004 is $14,001 thousands and $13,345 thousands, respectively, and the Company’s share in excess of profits over losses in a net amount of $88 thousands, $1,931 thousands and $676 thousands for the years ended December 31, 2005, 2004 and 2003, respectively. The financial statements of those subsidiaries and affiliated companies were audited by other independent registered public accounting firms whose reports thereon have been furnished to us and our opinion expressed herein, insofar as it relates to the amounts included for those companies, is based solely on the reports of the other independent registered public accounting firms. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Boards (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other independent auditors provide a reasonable basis for our opinion.   In our opinion, based on our audits and the reports of other independent registered public accounting firms, the financial statements referred to above present fairly, in all material respects, the financial position of the Company and its subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.   Tel Aviv, Israel  March 29, 2005         /s/ KESSELMAN & KESSELMAN CPAs ( ISR) A member of   PricewaterhouseCoopers International Limited      31      AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIESCONSOLI  DATED STATEMENTS OF INCOME (LOSS)     Fiscal Year Ended December 31,   2005 2004 2003   (U.S. Dollars in thousands, except per share data)             REVENUES:                   Equity in earnings of affiliates (Note 11)   $   6,666   $   4,031   $   2,526    Real estate income    9,244    9,020    8,889    Realized gains on investments (Note 2)    --    5,964    --    Realized and unrealized gains on marketable securities    3,203    1,929    29,813    (Loss) gain on sale of real estate rental       property (Note 2 )    --    (123 )  69    Interest income    1,567    590    508    Other  Income (note 12)    9,850    10,053    10,009                  Total revenues    30,530    31,464    51,814              EXPENSES:     Interest expense    5,257    4,880    5,531    Real estate expenses    8,651    8,874    8,110    Realized losses on investments (Notes 2 )    2,735    --    --    Loss from impairment of investments & real estate (Note 2)    13,984    38,811    13,144    Translation (gain) loss    2,220    (194 )  3,061    Other (mainly general and administrative)    10,957    11,806    10,747                  Total expenses    43,804    64,177    40,593         (Loss) Income before income taxes    (13,274 )  (32,713 )  11,221    Provision for income taxes (tax benefits) (Note 10)    (2,849 )  (10,198 )  434              (Loss) Income after income taxes (tax benefits)    (10,425 )  (22,515 )  10,787    Minority interests, net    (4,467 )  (4,130 )  1,940                        NET (LOSS) INCOME    $  (5,958 ) $ (18,385 ) $   8,847              Basic EPS: (Note 9)         (Loss) earnings per Class A share   $   (0.31 ) $   (0.94 ) $    0.42              Shares used in calculation (in thousands)    19,967    19,841    19,713              Diluted EPS:        (Loss) earnings per Class A Share   $   (0.31 ) $   (0.94 ) $    0.40             Shares used in calculation (in thousands)    19,967    19,841    22,120           The accompanying notes are an integral part of the consolidated financial statements.   32      AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES  CONSOLIDATED BALANCE SHEETS     Assets As At   December 31, 2005 December 31, 2004   (U.S. Dollars in thousands)           Cash and cash equivalents     $  24,314   $  17,618              Deposits, notes and loans receivable    343    3,534    Investments (Notes 2, 3 and 11):    Marketable securities (Note 3)    38,575    50,433    Other investments    54,903    127,023            Total investments    93,478    177,456         Real estate property, less accumulated depreciation of $13,907    and $12,190    70,989    63,191              Other assets (Note 4)    21,780    43,148                                TOTAL ASSETS   $ 210,904   $ 304,947          The accompanying notes are an integral part of the consolidated financial statements.   33     AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES  CONSOLIDATED BALANCE SHEETS     Liabilities and Shareholders' Equity As At   December 31, 2005 December 31, 2004   (U.S. Dollars in thousands except share amounts per share data)                                          LIABILITIES                    Notes and loans payable (Note 5)   $   50,366   $  118,760    Debentures    --    2,036    Deposits from tenants    52,880    52,152    Accounts payable, accrued expenses and others (Note 6)    18,669    26,002         Total liabilities    121,915    198,950        Commitments and Contingencies (note 15)     Minority interests, net    120    5,984                                        SHAREHOLDERS' EQUITY (Note 7)          4% Cumulative Convertible Preferred Stock, $5 par value; authorized     189,287 shares; issued 114,198 and 124,024 shares; outstanding    110,848 and 120,674 Shares    571    620         6-1/2% Cumulative Convertible Preferred Stock, $5 par value; authorized    988,055 shares; issued 641,423 and 662,219 shares; outstanding 518,887     and 539,683 shares    3,207    3,311         Class A Stock $1 par value; authorized 60,000,000 shares; issued    25,826,821 and 25,715,303 shares; outstanding 20,075,782 and 19,883,639     shares    25,827    25,715         Additional paid-in capital    58,252    58,211         Retained earnings    51,223    57,524         Accumulated other comprehensive loss    (19,518 )  (14,272 )       Treasury stock, at cost    (30,693 )  (31,096 )                 Total shareholders' equity    88,869    100,013              TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $  210,904   $  304,947          The accompanying notes are an integral part of the consolidated financial statements.   34      AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS     Fiscal Year Ended December 31,   2005 2004 2003   (U.S. Dollars in thousands)             Cash flows from operating activities:                  Net (loss) income   $  (5,958 ) $ (18,385 ) $   8,847    Adjustments to reconcile net (loss) income to net        cash provided by operating activities:    Equity in earnings of affiliates    (6,666 )  (4,031 )  (2,526 )  Realized and unrealized  net gains on    investments    (468 )  (7,893 )  (29,813 )  Loss (gain) on sale of real estate rental property    --    123    (69 )  Depreciation expense    1,978    2,168    2,173    Amortization income  from tenants deposits    (1,876 )  (1,944 )  (1,577 )  Impairment of investments    13,984    38,811    13,144    Minority interests    (4,467 )  (4,130 )  1,940    Translation (gain) loss    2,220    (194 )  3,061    Decrease (Increase) in other assets    14,006    537    (6,944 )  (Decrease) increase in accounts payable, accrued     expenses and other    6,387    (18,273 )  8,753    Investments made in trading securities    (12,868 )  (36,811 )  (54,411 )  Proceeds from sale of trading securities    32,595    59,834    39,370    Dividends received from affiliates    4,335    3,277    5,638                   Net cash  provided by (used in) operating activities .    43,202    13,089    (12,414 )                 Cash flows from investing activities:     Deposits, notes and loans receivable collected    2,872    14,935    1,888     Deposits, notes and loans receivable granted    (1,024 )  (6,696 )  (3,772 )   Investments made in:     Affiliates and others    (30,621 )  (6,295 )  (1,367 )   Proceeds from sale of investments:     Affiliate Company    3,041    --    19,511     Others    72,315    16,556    --     Return of capital by partnership    --    --    213     Capital improvements    (9,884 )  (1,075 )  (823 )   Acquisition of minority interest    --    --    (481 )   Proceeds from sale of real estate property, net    --    236    1,350                    Net cash provided by investing activities    36,699    17,661    16,519           The accompanying notes are an integral part of the consolidated financial statements.   35     AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS     Fiscal Year Ended December 31,   2005 2004 2003   (U.S. Dollars in thousands)             Cash flows from financing activities:                  Notes and loans payable received   $   8,869   $   6,463   $  19,871    Long term loan received by partnership    minority    2,050    --    --    Notes and loans payable repaid    (78,875 )  (23,655 )  (1,934 )  Proceeds from exercise of stock options    251    --    --    Debentures repaid    (2,023 )  (1,753 )  (19,271 )  (Distribution) contribution to partnership by minority interests    (3,567 )  40    --    Dividends paid on preferred stock    (191 )  (200 )  (213 )            Net cash used in financing activities    (73,486 )  (19,105 )  (1,547 )       Effect of exchange rate changes on cash and        cash equivalents    281    1,401    457         Net increase in cash and cash equivalents    6,696    13,046    3,015    Cash and cash equivalents at beginning of year    17,618    4,572    1,557              Cash and cash equivalents at end of year   $  24,314   $  17,618   $   4,572              Supplemental Disclosure of Cash Flow Information    Cash paid during the year:    Interest    2,535    5,170    5,187              Income taxes paid   $      68   $   3,763   $   2,053              Proceeds on trading securities received from realization of an    investment   $   3,316   $   2,267    --              Supplemental disclosure of non cash operating Activities:    Dividend in kind from an affiliate   $   7,088   $  --   $  --                The accompanying notes are an integral part of the consolidated financial statements.   36      AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY     Fiscal Year Ended December 31,   2005 2004 2003   (U.S. Dollars in thousands, except share amounts per share data)             4% PREFERRED STOCK                  Balance, beginning of year   $     620   $     660   $     697    Conversion of 9,826, 7,928 and 7,439 shares       into Class A Stock    (49 )  (40 )  (37 )       Balance, end of year   $     571   $     620   $     660              6-1/2% PREFERRED STOCK    Balance, beginning of year   $   3,311   $   3,487   $   3,532    Conversion of 20,796, 35,161 and 9,070 shares        into Class A Stock    (104 )  (176 )  (45 )       Balance, end of year   $   3,207   $   3,311   $   3,487              CLASS A STOCK    Balance, beginning of year   $  25,715   $  25,567   $  25,503    Issuance of shares upon conversion of    Preferred Stock    112    148    64         Balance, end of year   $  25,827   $  25,715   $  25,567              ADDITIONAL PAID-IN CAPITAL    Balance, beginning of year   $  58,211   $  58,143   $  58,125    Conversion of Preferred Stock    41    68    18              Balance, end of year   $  58,252   $  58,211   $  58,143              RETAINED EARNINGS    Balance, beginning of year   $  57,524   $  76,109   $  67,475    Net (loss) income    (5,958 )  (18,385 )  8,847    Loss from treasury stock reissued for exercised stock    option    (152 )  --    --         Dividends:    4% Preferred Stock - $0.20 per share    (22 )  (24 )  (26 )    6-1/2% Preferred Stock - $0.325 per share    (169 )  (176 )  (187 )       Balance, end of year   $  51,223   $  57,524   $  76,109           The accompanying notes are an integral part of the consolidated financial statements.   37     AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY     Fiscal Year Ended December 31,   2005 2004 2003   (U.S. Dollars in thousands, except share amounts per share data)             TREASURY STOCK:                        4% PREFERRED STOCK     Balance, beginning  and end of year   $      (84 ) $      (84 ) $      (84 )             6-1/2% PREFERRED STOCK     Balance, beginning and end of year   $   (1,853 ) $   (1,853 ) $   (1,853 )             CLASS A STOCK    Balance, beginning of year - 5,831,664, 5,831,664 and  5,831,664 shares, at cost   $  (29,159 ) $  (29,159 ) $  (29,159 )        Issuance of 80,625 shares    403    --    --         Balance, end of year - 5,751,039, 5,831, 664    and 5,831,664 shares, at cost   $  (28,756 ) $  (29,159 ) $  (29,159 )            Balance, end of year   $  (30,693 ) $  (31,096 ) $  (31,096 )            ACCUMULATED OTHER COMPREHENSIVE    LOSS     Cumulative translation adjustments:     Balance, beginning of year   $  (20,083 ) $  (20,596 ) $  (20,750 )   Foreign currency translation adjustments    348    513    154          Balance, end of year    (19,735 )  (20,083 )  (20,596 )             Unrealized gains (losses) on available for sale       securities:     Balance, beginning of year    5,811    2,749    (3,308 )   Unrealized (losses) gains, net    (1,472 )  3,396    4,772     Sale of available-for-sale securities    (4,122 )  (334 )  1,285          Balance, end of year    217    5,811    2,749              Balance, end of year   $  (19,518 ) $  (14,272 ) $  (17,847 )            Total Shareholders' equity   $   88,869   $  100,013   $  115,023           The accompanying notes are an integral part of the consolidated financial statements.   38      AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)     Fiscal year ended December 31,   2005 2004 2003   (U.S. Dollars in thousands)             Net (loss) Income     $  (5,958 ) $ (18,385 ) $   8,847         Other comprehensive (loss) income, net of tax:     Foreign currency translation adjustments    348    513    154     Unrealized gain (loss) on securities    (1,472 )  3,396    4,772    Sale of available for sale securities    (4,122 )  --    --          Other comprehensive income (loss)    (5,246 )  3,909    4,926               Comprehensive (loss) income   $ (11,204 ) $ (14,476 ) $  13,773             Fiscal year ended December 31,   2005 2004 2003   (U.S. Dollars in thousands)             Related tax (expense) benefit of other comprehensive                       (loss) income:     Foreign currency translation adjustments   $   (731 ) $    (71 ) $    (31 )   Unrealized gains on securities   $  3,012   $ (1,648 ) $ (2,688 )   *  See note 1(m)  The accompanying notes are an integral part of the consolidated financial statements.   39      AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     Note 1   –   Summary of Significant Accounting Policies         (a)   General          (1)  Ampal is a New York corporation founded in 1942. The Company primarily acquires                interests in businesses located in the State of Israel or that are                Israel-related.          (2)  As used in these financial statements, the term the “Company” refers                to Ampal-American Israel Corporation (“Ampal”) and its consolidated                subsidiaries. As to segment information see note 13.          (3)  The consolidated financial statements are prepared in accordance with generally                accepted accounting principals (GAAP) in the United States.          (4)  The preparation of financial statements in conformity with generally accepted           accounting principles requires management to make estimates and assumptions that           affect the reported amounts of assets and liabilities, disclosure of contingent           assets and liabilities at the date of the financial statements and the reported           amounts of revenues and expenses during the reporting period. Actual results           could differ from those estimates.        (b)   Consolidation               The consolidated financial statements include the accounts of Ampal and its controlled and majority owned subsidiaries. Inter-company transactions and balances are eliminated in consolidation.     (c)   Translation of Financial Statement in Foreign Currencies               For those subsidiaries and affiliates whose functional currency is other than the US Dollar, assets and liabilities are translated using year-end rates of exchange. Revenues and expenses are translated at the average rates of exchange during the year. Translation differences of those foreign companies’ financial statements are reflected in the cumulative translation adjustment accounts which are included in accumulated other comprehensive income (loss).           In subsidiaries where the primary currency is the US Dollar, accounts maintained in currencies other than the U.S. Dollar are remeasured in to U.S. Dollars using the representative foreign exchange rate at the balance sheet date. Operational accounts and nonmonetary balance sheet accounts are measured and recorded at the rate in effect at the date of the transaction. The effects of foreign currency remeasurement are reported in current operations.     (d)   Foreign Exchange Forward Contracts              The Company’s derivative financial instruments consist of foreign currency forward exchange contracts. These contracts are utilized by the Company, from time to time, to manage risk exposure to movements in foreign exchange rates. None of these contracts qualify for hedge accounting. These contracts are recognized as assets or liabilities on the balance sheet at their fair value, which is the estimated amount at which they could be settled based on market prices or dealer quotes, where available, or based on pricing models. Changes in fair value are recognized currently in earnings.           At December 31, 2005, the Company did not have any open foreign currency forward exchange contracts to purchase or sell US Dollars.   40       (e)   Investments                    (i)  Investments in Affiliates             Investments in which the Company exercises significant influence, generally 20% to 50% owned companies (“affiliates”), are accounted for by the equity method, whereby the Company recognizes its proportionate share of such companies’ net income or loss and in other comprehensive income its proportional share in translation difference on net investments and in other comprehensive income (loss). The Company reduces the carrying value of its investment in an affiliate if an impairment in value of that investment is deemed to be other than temporary.                 (ii)  Investments in Marketable Securities             Marketable equity securities, other than equity securities accounted for by the equity method, are reported based upon quoted market prices of the securities. For those securities, which are classified as trading securities, realized and unrealized gains and losses are reported in the statements of income (loss). Unrealized gains and losses net of taxes from those securities, that are classified as available-for-sale, are reported as a separate component of shareholders’ equity and are included in accumulated other comprehensive income (loss) until realized. Decreases in value determined to be other than temporary on available-for-sale securities are included in the statements of income (loss).                (iii)  Cost Basis Investments             Equity investments of less than 20% in non-publicly traded companies are carried at cost. Changes in the value of these investments are not recognized unless an impairment in value is deemed to be other than temporary.     (f)   Risk Factors and Concentrations              Financial instruments that subject the Company to credit risk consist primarily of cash, cash equivalents, bank deposits, marketable securities and notes and loans receivable. The Company invests cash equivalents and short-term investments through high-quality financial institutions. The Company’s management believes that the credit risk in respect of these balances is not material.           The company performs on going credit evaluation of its receivables allowance for doubtful accounts.     (g)   Real – Estate Property              The assets are recorded at cost, depreciating these costs over the expected useful life of the related assets.           Real-Estate property of a subsidiary, which existed at the time of the subsidiary’s acquisition by the company, are included at their fair value as that date.           The Company applies the provisions of SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived assets” (“SFAS 144”). SFAS 144 requires that long-lived assets, to be held and used by an entity, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Under SFAS 144, if the sum of the expected future cash flows (undiscounted and without interest charges) of the long-lived assets is less than the carrying amount of such assets, an impairment loss would be recognized, and the assets are written down to their estimated fair values.   41       (h)   Leasehold improvements               Fixed asserts leased by the companies under capital leases are classified as the companies’ assets and are recorded, at the inception of the lease, at the lower of the asset’s fair value or the present value of the minimum lease payments (not including the financial component). Leasehold improvements are amortized by the straight-line method over the term of the lease, which is shorter than the estimated useful life of the improvements.,     (i)   Income Taxes               The Company applies the asset and liability method of accounting for income taxes, whereby deferred taxes are recognized for the tax consequences of “temporary differences” by applying estimated future tax effects of differences between financial statements carrying amounts and the tax bases of existing assets and liabilities. Deferred tax assets are created to the extent management believes that it is more likely than not that it will be utilized, otherwise a valuation is provided for those assets that do not qualify under this term.           Deferred income taxes are not provided on undistributed earnings of foreign subsidiaries adjusted for translation effect totaling approximately $29.5 million in 2004 and $0 in 2005, since such earnings are currently expected to be permanently reinvested outside the United States. If the earnings were not considered permanently invested, the Company would have paid approximately $10.3 million in 2004 and $0 in 2005 in deferred income taxes.           Income taxes are provided on equity in earnings of affiliates, gains on issuance of shares by affiliates and unrealized gains on investments. Ampal’s foreign subsidiaries file separate tax returns and provide for taxes accordingly.     (j)   Revenue Recognition               Rental income is recorded over the rental period. Revenues from services provided to tenants and country-club subscribers are recognized ratably over the contractual period or as services are performed. Guaranteed dividend payments from Motorola are recorded in the statement of income (loss) over the guaranteed period (see also note 2(b)). Revenue from amortization of tenant deposits is calculated at a fixed periodic rate based on the specific terms in the occupancy agreement signed with the tenants.     (k)   Cash Equivalents               Cash equivalents are short-term, highly liquid investments that have original maturities of three months or less and that are readily convertible to cash.     (l)   Earning (loss) per share (EPS)               Basic and diluted net earning (loss) per share are presented in accordance with SFAS No. 128 “Earnings per share” (“SFAS No. 128”), and as from 2004, but with retroactive effect, with EITF 03-06 “participating securities and the two-class method under FAS 128", for all periods presented. In 2005 and 2004, all outstanding stock options and preferred shares have been excluded from the calculation of the diluted loss per share because all such securities are anti-dilutive for these periods presented. Also, participating 4% Convertible Preferred Stock were not taken into account in the computation of the basic EPS for those years since its shareholders do not have contractual obligation to share in the losses of the Company. In 2003, the basic EPS was computed using the two-class method. The implementation of EITF 03-06 to prior periods resulted in immaterial change (less than $0.01) in the basic EPS for 2003. The total number of common shares related to outstanding options and preferred shares excluded from the calculations of diluted net loss per share was 2,024,500 and 2,064,500 for the years ended December 31, 2005 and 2004, respectively. As to data used in the per share computation see Note 9 .   42       (m)   Comprehensive Income               SFAS No. 130, “Reporting Comprehensive Income”, (“SFAS No. 130”) established standards for the reporting and display of comprehensive income (loss), its components and accumulated balances in a full set of general purpose financial statements. The Company’s components of other comprehensive income (loss) are net income (losses), income (loss) from selling available for sale investments, net unrealized gains or losses on investments held as available for sale and foreign currency translation adjustments, which are presented net of income taxes. Comprehensive income in the consolidated statements of comprehensive income (loss) in the years 2004 and 2003 does not include amounts for realized gain on available for sale securities, as the amounts are not material.     (n)   Employee Stock Based Compensation               The Company accounts for all employee stock options plans under APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Accordingly, the compensation cost relating to stock options is charged on the date of grant of such options, to shareholders’ equity, under deferred compensation, and it thereafter amortized by the straight – line method and charged against income over vesting period. No compensation costs were incurred in the years ended December 31, 2005, 2004 and 2003, because the exercise price on the date of grant equals fair value of the stock.           SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”) as amended by SFAS 148 established a fair value-based method of accounting for employee stock options or similar equity instruments and encourages adoption of such method for stock compensation plans. However, it also allows companies to continue to account for those plans using the accounting treatment prescribed by APB No. 25. The Company has elected to continue accounting for employee stock option plans according to APB No. 25 and accordingly discloses pro forma data assuming the Company had accounted for employee stock option grants using the fair value based method as defined in SFAS No. 123.           If compensation cost for the options under the plans in effect been determined in accordance with SFAS No. 123, the Company’s net income (loss) and EPS would have been reduced as follows:      Fiscal Year Ended December 31,    2005 2004 2003    (In thousands, except per share data)               Basic EPS:                             Net (loss) income:    As reported   $  (5,958 ) $ (18,385 ) $    8,847         Less - stock based    compensation expense    Determined under fair value    method        (874 )  (569 )  (496 )                 Pro forma    (6,832 )  (18,954 )  8,351                   As reported(1)   $   (0.31 ) $   (0.94 ) $     0.42        Pro forma(1)   $   (0.35 ) $   (0.97 ) $     0.40            43        Fiscal Year Ended December 31,    2005 2004 2003    (In thousands, except per share data)               Diluted EPS:                                 As reported   $ (0.3 1) $ (0.9 4) $ 0.40        Pro forma   $ (0.3 5) $ (0.9 7) $ 0.38           (1)After deduction of accrued Preferred Stock Dividend (in thousands) of $191 and $200 and $213, for the years 2005, 2004 and 2003, respectively.              Under SFAS No. 123, the fair value of each option is estimated on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions for 2005, 2004 and 2003, respectively: (1) expected life of options of 5 years; (2) dividend yield of 0%; (3) volatility ranging from 46% to 60%; and (4) risk-free interest rate ranging from 3.3% to 4.08%.     (o)   Treasury stock               These shares are presented as a reduction of shareholders’ equity at their cost to the Company.     (p)   Recently Issued AccountingPronouncements               For 123R (Revised 2004) Share Based Payment           In December 2004, the Financial Accounting Standards Board (“FASB”) issued the revised Statement of Financial Accounting Standards (“FAS”) No. 123, Share-Based Payment (FAS 123R), which addresses the accounting for share-based payment transactions in which the Company obtains employee services in exchange for (a) equity instruments of the Company or (b) liabilities that are based on the fair value of the Company’s equity instruments or that may be settled by the issuance of such equity instruments. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SEC’s interpretation of FAS 123R.           FAS 123R eliminates the ability to account for employee share-based payment transactions using APB Opinion No. 25 – “Accounting for Stock Issued to Employees”, and requires instead that such transactions be accounted for using the grant-date fair value based method. This Statement will be effective as of the beginning of the first interim period after June 15, 2005 (January 1, 2006 for the Company). Early adoption of FAS 123R is encouraged. This Statement applies to all awards granted or modified after the Statement’s effective date. In addition, compensation cost for the unvested portion of previously granted awards that remain outstanding on the Statement’s effective date shall be recognized on or after the effective date, as the related services are rendered, based on the awards’ grant date fair value as previously calculated for the pro-forma disclosure under FAS 123.           The Company estimates that the cumulative effect of adopting FAS 123R, as of its adoption date by the Company (January 1, 2006), based on the awards outstanding as of December 31, 2005, will not be material. This estimate does not include the impact of additional awards, which may be granted, or forfeitures, which may occur subsequent to December 31, 2005 and prior to the adoption of FAS 123R.           The Company expects that upon the adoption of FAS 123R, the Company will apply the modified prospective application transition method, as permitted by the Statement. Under such transition method, upon the adoption of FAS 123R, the Company’s financial statements for periods prior to the effective date of the Statement will not be restated.   44             The Company expects, based on the awards outstanding as of December 31, 2005, that this statement will have an estimated effect of $0.8 million on its financial position and results of operations in 2006.   FAS 154 - - No  accounting  Changes  and  Error  Corrections  - a  replacement  of APB  Opinion  No.  20 and FASB Statement No. 3           In June 2005, the Financial Accounting Standards Board issued FAS No. 154,“Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No.3". This Statement generally requires retrospective application to prior periods’ financial statements of changes in accounting principle. Previously, Opinion No. 20 required that most voluntary changes in accounting principle were recognized by including the cumulative effect of changing to the new accounting principle in net income of the period of the change. FAS 154 applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. This Statement shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 (Year 2006 for the Company). We do not expect the adoption of this statement will have a material impact on our results of operations, financial position or cash flow.     (q)   Reclassifications               Certain comparative figures have been reclassified to conform to the current year presentation.     Note 2   –   Acquisitions, Dispositions and Impairments         (a)   In 2005, the Company made the following investments:          1.  On December 1, 2005 the Company acquired a 2% interest in EMG from Merhav. EMG           is an Egyptian joint stock company organized in accordance with the Egyptian           Special Free Zones system which has been given the right to export natural gas           from Egypt to Israel and other locations in the East Mediterranean basin and           other countries. Egyptian natural gas shall reach the Israeli market via an           underwater pipeline owned by EMG. Under the terms of the transaction, the           Company acquired a 2% beneficial ownership in EMG for a purchase price of           $29,960,000. Additionally, the Company was granted the exclusive right to           negotiate to acquire a substantial portion of Merhav’s remaining shares of           EMG. The Company also has the right for a period of time to require Merhav to           repurchase the EMG interest.           Yosef A. Maiman, the chairman of the Company’s Board of Directors and the Company’s controlling shareholder, is the sole owner of Merhav. The transaction was approved by a special committee of the Board of Directors composed of the Company’s independent directors. Houlihan Lokey Howard & Zukin Financial Advisors, Inc. acted as financial advisors to the special committee.          2.  Additional investment of $0.7 million in Fimi Opportunity Fund, L.P.           (“Fimi”).          3.  A loan to Bay Heart Ltd. of $0.9 million, a shopping mall.      45       (b)   In 2005, the Company made the following dispositions:          1.  During the third and fourth quarter of 2005, one of the holdings of           Ampal’s investee companies, TP received proceeds at the amount of $1.1           million from selling all its assets in Grapes Communications N.V./S.A. and its           holdings in PSINet Europe B.V.          2.  On October 3, 2005 the Company, through Ampal Communications L.P., completed           the sale to Motorola Israel Ltd. of all of its 25% holdings of MIRS pursuant to           the Agreement. In connection with the sale of its holdings of MIRS, Ampal           Communications L.P. received approximately US $89 million of total proceeds,           composed of US $67.7 million for the purchase price and an additional US $21.3           million related to guaranteed dividend payments. During the third quarter of           2005, the Company recorded a $13.3 million loss from impairment relating to this           investment.          3.  On September 7, 2005 a third-party Israeli based venture fund and certain of           its affiliated companies invested $2.65 million in the Company’s high-tech           and communications portfolio. Ampal received $2.5 million in connection with           this transaction. The Company treated this investment as a disposition for           accounting purposes and recorded a loss of $7.3 million ($4.6 million after           taxes).           4.  On August 15, 2005 the Company sold its holdings in Epsilon Investment House           Ltd. and Renaissance Investment Company Ltd. for $2.0 million and recorded a           $1.4 million gain.          5.  On July 11, 2005, the Company sold its holdings in Xpert Ltd. for $0.8 million           and recorded a loss of $0.2 million.          6.  On March 8, 2005, the Company sold its holdings in Modem Art Ltd. for $4.4           million and recorded a gain of $3.3 million.        (c)                  In 2005, the Company recorded loss from impairment of investments and loan of                $14.0 million as follows:          1.  MIRS Ltd. ($13.3 million)         2.  Shiron Ltd. ($0.6 million)         3.  Other loans ($0.1           million)         (d)   In 2004, the Company made investments aggregating $6.3 million, as           follows:          1.  The Company invested EUR 4.9 million (approximately US$5.8 million) in           “Telecom Partners Limited Partnership”, a newly formed entity that           will serve as a platform for investments in the telecommunication industry           predominantly outside of Israel. Ampal holds 33.3% of TP which currently holds           investments in two European telecom service providers: PSINet Europe B.V.           (“PSInet”) and Grapes Communications N.V./S.A.          2.  A loan of $0.2 million to ShellCase, the principal business of which is the           packaging process of semiconductor chips.          3.  An investment of $0.3 million in Fimi Opportunity Fund, L.P. (Fimi).         (e)   In 2004, the Company made the following dispositions:          1.  On February 19, 2004, Ampal sold its holdings in XACCT Technology Ltd. for $3.8           million.      46         2.  During May 2004, the Company sold 49% of its holdings in PowerDSine Ltd. for           approximately $7.4 million.          3.  During the third quarter of 2004, PSInet, one of the holdings of Ampal’s           investee company, TP, sold all its assets to large telecommunications providers.           Following the sale, a portion of the proceeds was distributed to TP, of which           Ampal received $7.1 million and recorded a gain of $2.5 million in connection           with this transaction. The remaining carrying value is $1.2 million.        (f)   In 2004, the Company recorded loss from impairment of investments of $38.8           million as follows:          1.  MIRS Ltd. ($30 million)*          2.  Star Management of Investment ($1.6 million)          3.  Courses Investment in Technology Ltd. ($0.3 million)          4.  VisionCare Opthalmic Technologies ($0.5 million investment)          5.  ShellCase Ltd. ($3.8 million)          6.  Identify Solutons Ltd. ($0.7 million)          7.  Xpert Integrated Systems Ltd. ($1.7 million)          8.  Peptor Ltd. ($0.2 million).            * Management determined that a reduction in the carrying value of MIRS by $30 million is appropriate at the time due to the then existing relationship with Motorola.        (g)   In 2003, the Company made investments aggregating $ 1.8 million, as follows:          1.  An additional investment of $0.9 million in ShellCase Ltd. The company holds an           approximate 13.84% equity interest in ShellCase Ltd.          2.  An additional investment of $0.3 million in Star Management of Investment No.           II (2000) L.P., a venture capital fund which focuses on investment in           communication, Internet, software and medical devices.          3.  An investment of $0.2 million in Fimi Opportunity Fund, L.P.          4.  A loan of $0.1 million to Shiron Ltd., a developer and manufacturer of two-way           satellite communications products.          5.  A loan to Netformx Ltd. of $0.2 million, a developer of network design tools.          6.  A loan to Bay Heart Ltd. of $0.1 million, a shopping mall.         (h)                  During 2003, the Company, which previously held a 20.4% interest in Granite,                sold 9.9% of its holding for $19.5 million. Consequently, the Company’s                investment in Granite, which was previously accounted for by the equity method,                was accounted for as an investment in trading marketable securities. (The                remaining holding in Granite was sold in 2004).      47       (i)   In 2003, the Company recorded loss from impairment of investments of $13.1           million as follows:          1.  XACCT Technologies Ltd. (“XACCT”) ($9.0 million investment).          2.  Carmel Container Ltd. ($2.0 million).          3.  Identify Solution Ltd. ($1.3 million investment).          4.  Cute Ltd. ($0.2 million loan).          5.  Real estate in Migdal Haemek ($0.6 million).         Note 3   –   Investments in Marketable Securities               The Company classifies investments in marketable securities as trading securities or available-for-sale securities.        (a)   Trading Securities            The cost and market values of Trading securities at December 31, 2005 and 2004 are as follows:        Cost Unrealized Gains Market Value   (U.S. Dollars in thousands)                  2005     $ 36,316   $     71   $ 36,387                  2004   $ 43,353   $  2,012   $ 45,365                (b)   Available-For-Sale Securities            The cost and market values of available-for-sale securities consisting of marketable securities only at December 31, 2005 and 2004 are as follows:        Cost Unrealized Gains Market Value   (U.S. Dollars in thousands)                  2005     $ 1,855   $   333   $ 2,188                  2004   $ 2,164   $ 2,904   $ 5,068           48       Note 4   –   Other Assets               The balance of “Other Assets” as of December 31, 2005 and 2004, is composed of the following items:     As of December 31,   2005 2004   (U.S. Dollars in thousands)           Deferred tax assets     $ 15,681   $ 23,023                Income receivables    480    14,987                Account receivable-trade    1,132    1,094                Deferred expenses    1,424    353                Leasehold improvements    2,595    2,931                                             Others    468    760                        $ 21,780   $ 43,148            Note 5   –   Notes and Loans Payable               Notes and loans payable consist primarily of bank borrowings either in U.S. dollars, linked to the Consumer Price Index in Israel or in unlinked Israel Shekels with interest rates varying depending upon their linkage provision and mature between 2006 and 2010.           The Company financed a portion of the $9.8 million real estate acquisition by Am-Hal, a wholly-owned subsidiary of the Company, which develops and operates luxury retirement centers for senior citizens, through a revolving credit facility from Hapoalim, Phoenix Insurance Company and others. On December 1, 2005, a loan agreement creating the facility was signed between Am-Hal, Phoenix Insurance Company and others. Pursuant to the loan agreement, the lenders granted the Company a revolving credit facility in Israeli Shekels equal to $12.5 million. The annual interest rate on the loan, which matures in 10 years, is 7.5%. The interest rate and the principal of the loan will be adjusted based on the changes in the Israeli Consumer Price Index. As of December 31, 2005 the Company had drawn $2.5 million from the facility. As of December 31, 2005 and December 31, 2004 the amounts outstanding under these loans were $13.5 million and $7.7 million, respectively. The loans excluding the Phoenix loan, mature in up to one year and have interest rates range between 5.4% and 7.5%. The Company generally repays these loans with the proceeds received from deposits and other payments from the apartments in Am-Hal facilities. The loans are secured by a lien on Am-Hal’s properties and bank accounts. The Company also issued guarantees in the amount of $3.6 million in favor of tenants of Am-Hal in order to secure their deposits           The Company also finances its general operations and other financial commitments through bank loans with Hapoalim. The long-term loans in the amount of $31.3 million mature through 2006-2010.           Other long term borrowings in the amount of $1.9 million are linked to the Israeli C.P.I and mature between 2006 and 2010, of which an amount of $1.4 million bears no interest. The remaining $0.5 million bears an annual interest of 5.7%.   49             The weighted average interest rates on the balances of short-term borrowings at year-end are as follows: 6.0% on $15.0 million and 3.5% on $13.0 million in 2005 and 2004, respectively.   Payments due by period:     (US. Dollars in thousands)   Total Less than 1 year 1-3 years 3-5 years More than 5 years                        Long-Term Debt     $ 35,406   $ 10,443   $ 12,412   $  9,521   $  3,030            Short--Term Debt   $ 14,960   $ 14,960        Note 6   –   Accounts payable accrued expenses and others         (a)   Composition:        As of December 31,   2005 2004   (U.S. Dollars in thousands)           Deferred tax liabilities     $  3,310   $ 15,886         Deferred income and accrued expenses    2,283    3,664         Excess of share in losses of affiliate over the    investment    3,456    3,342         Related party    5,081    41         Deferred expenses from warrants*    1,300    --         Others    3,239    3,069                 $ 18,669   $ 26,002            *   As part of the loan agreement between Am-Hal and Phoenix Insurance Company, the lender is granted a warrant to purchase 19.9% (on fully diluted basis) of the issued and paid capital of Am - Hal (the “warrant”). The warrant is exercisable during a period of 4 years and can be exercised for payment of $5,960,000. The number of shares under the warrant is adjusted for stock splits or bonus shares, and also adjusted for any new issuances to third parties; in such case the lender’s number of shares under the warrant will increase respectively, so as to provide the lender with 19.9% of the outstanding shares after the issuance to a third party. The exercise price for the additional shares (19.9% of the shares issued to the third party) will be equal the price paid by such third party. Also if there is a public offering in a price less then the exercise price of the warrant, the exercise price of the warrant will be adjusted to represent the price in the public offering discounted by 15%. The warrant can only be exercised for the full 19.9% – there can be no partial exercise at any time. The value of the warrant was estimated at approximately $1.3million and recorded as deferred expenses (Note 4). No amortization is recorded in the reported period, since it is immaterial.      50       (b)   Accrued severance liabilities           Israeli labor laws and agreements require payment of severance pay upon dismissal of an employee or upon termination of employment in certain other circumstances. Ampal severance pay liability in Israel, which reflects the undiscounted amount of the liability as if it was payable at each balance sheet date, is calculated based upon length of service and the latest monthly salary (one month’s salary for each year worked).           The Company’s liability for severance pay pursuant to Israeli law is partly covered by insurance policies. The accrued severance pay liability of $ 0.8 million, net of deposits made to insurance policies of $ 0.5 million, is included in accounts payable, accrued expenses and other liabilities.           Severance pay net increase (decrease) was approximately ($37,800), $21,000, and $134,000 in 2005, 2004, and 2003, respectively.           The Company expects that the payments relating to future benefits to its employees upon their retirement at normal retirement age in the next 10 years will be immaterial. These payments are determined based on recent salary rates and do not include amounts that might be paid to employees that will cease working with the Company, before their normal retirement age or amount paid to employees that their normal retirement age extends beyond the year 2015.        Note 7   –   Shareholders’ Equity       Capital Stock           The 4% and 6-1/2% preferred shares are convertible into five and three shares of Class A Stock, respectively. At December 31, 2005, a total of 2,375,500 shares of Class A Stock are reserved for issuance upon the conversion of the Preferred Stock and the exercise of 2,024,500 options.           The 4% and 6-1/2% Preferred Stock are preferred as to dividends on a cumulative basis. Additional dividends out of available retained earnings, if declared, are payable on an annual non-cumulative basis as a percentage of par value as follows:       (i)  up to 4% on Class A Stock, then           (ii)  on 4% Preferred Stock and Class A Stock ratably.               Preferred shares are non-voting, unless dividends are in arrears for three successive years. At December 31, 2005, there are no dividends in arrears.     Note 8   –   Stock Options               In March 1998, the Board approved a Long-Term Incentive Plan (“1998 Plan”) permitting the granting of options to all employees, officers, directors and consultants of the Company and its subsidiaries to purchase up to an aggregate of 400,000 shares of Class A Stock. The 1998 plan was approved by the majority of the Company’s shareholders at the June 19, 1998, annual meeting of shareholders. The plan remains in effect for a period of ten years. As of December 31, 2005, 30,000 options of the 1998 Plan are fully vested and outstanding.   51             On February 15, 2000, the Stock Option Committee approved a new Incentive Plan (“2000 Plan”), under which the Company has reserved 4 million shares of Class A Stock, permitting the granting of options to all employees, officers and directors. The 2000 Plan was approved by the Board of Directors of Ampal (the “Board”) at the meeting held on March 27, 2000 and was approved by a majority of the Company’s shareholders at the June 29, 2000 annual meeting of shareholders. The plan remains in effect for a period of ten years. As of December 31, 2005, 1,994,500 options under the 2000 Plan are outstanding.           The options granted under the 1998 Plan and the 2000 Plan (collectively, the “Plans”) may be either incentive stock options, at an exercise price to be determined by the Stock Option Compensation Committee (the “Committee”) but not less than 100% of the fair market value of the underlying options on the date of grant, or non-incentive stock options, at an exercise price to be determined by the Committee. The Committee may also grant, at its discretion, “restricted stock,” “dividend equivalent awards,” which entitle the recipient to receive dividends in the form of Class A Stock, cash or a combination of both and “stock appreciation rights,” which permit the recipient to receive an amount in the form of Class A Stock, cash or a combination of both, equal to the number of shares of Class A Stock with respect to which the rights are exercised multiplied by the excess of the fair market value of the Class A Stock on the exercise date over the exercise price. The options granted under the plans were granted either at market value or above.           Under each of the Plans, all granted but unvested options become immediately exercisable upon the occurrence of a change in control of the Company. On April 25, 2002, the controlling shareholder of the Company, Rebar Financial Corp. sold all of its stock in the Company to Y.M. Noy Investments Ltd., accordingly, the 329,000 outstanding options granted under the Plans were immediately exercisable.   As of December 31, 2005, 2,375,500 options under both Plans are available for future grant.   Transactions under both Plans were as follows:   The options granted under the plans vest in equal installment every three months, except that a portion of the options may vest on an accelerate basis upon the achievement of certain performance criteria.     Fiscal Year Ended December 31, 2005   Options Weighted Average Exercise Price   (In thousands, except per share data)           Outstanding at beginning of year      2,064   $ 3.39    Granted at market price    135   $ 3.69    Forfeited/Expired    (175 ) $ 3.85        Outstanding at end of year    2,024   $ 3.37             Exercisable at end of year    1,044   $ 3.29             Weighted average grant date fair value of options granted        $ 1.68             Weighted average remaining contractual life         7.72          52       Fiscal Year Ended December 31, 2004   Options Weighted Average Exercise Price   (In thousands, except per share data)           Outstanding at beginning of year      1,396   $ 3.46    Granted at market price    886   $ 3.49    Forfeited/Expired    (218 ) $ 4.22        Outstanding at end of year    2,064   $ 3.39             Exercisable at end of year    678   $ 3.43             Weighted average grant date fair value of options granted        $ 1.89             Weighted average remaining contractual life         8.40                                                                                             ---------------           Fiscal Year Ended December 31, 2003   Options Weighted Average Exercise Price   (In thousands, except per share data)           Outstanding at beginning of year      2,852   $ 14.77    Granted at market price    58   $  3.69    Forfeited/Expired    (1,514 ) $ 24.78        Outstanding at end of year    1,396   $  3.46             Exercisable at end of year    500   $  3.83             Weighted average grant date fair value of options granted        $  2.13             Weighted average remaining contractual life         8.20          53       Note 9   –   Earnings (Loss) Per Class A Share       A reconciliation between the basic and diluted EPS computations for net earnings is as follows:     Fiscal Year Ended December 31, 2005   (Loss) Shares Per Share Amounts   (In thousands, except per share data)             Basic and diluted EPS(2)                   Net (loss) attributable to Class A Stock   $ (6,149 )(1)  19,967   $ (0.3 1)           Fiscal Year Ended December 31, 2004   (Loss) Shares Per Share Amounts   (In thousands, except per share data)             Basic and diluted EPS(2)                   Net (loss) attributable to Class A Stock   $ (18,585 )(1)  19,841   $ (0.9 4)           Fiscal Year Ended December 31, 2003   Income Shares Per Share Amounts   (In thousands, except per share data)             Basic EPS:                       Net income attributable to Class A Stock   $ 8,355 (1)(3)  19,713   $ 0.42                       Diluted EPS:         Net income attributable to Class A Stock   $ 8,847    22,120   $ 0.40             (1)   After deduction of Preferred Stock dividends (in thousands) of $191, $200 and           $213 in 2005, 2004 and 2003, respectively.       (2)   Options to purchase 2,024,500 and 2,064,500 shares of common stock were                outstanding as of December 31, 2005 and 2004, respectively, and they were not                included in the computation of diluted EPS because of their anti-dilutive                effect.        (3)   After allocation of net income to the participating 4% Cumulative Convertible           Preferred Stock.      54       Note 10   –   Income Taxes         Fiscal Year Ended December 31,   2005 2004 2003   (U.S. Dollars in thousands)             The components of current and deferred income tax                     expense (benefit) are:    Current:       Federal   $  -   $  -   $     275       Foreign    -    1,472    13          Deferred:       State and local    3    -    -       Federal    (2,955 )  (20,404 )  5,202       Foreign    103    8,734    (5,056 )          Total   $  (2,849 ) $ (10,198 ) $     434                   The domestic and foreign components of       income (loss) before income       taxes are:         Domestic   $ (14,046 ) $ (29,286 ) $   2,316    Foreign    772    (3,427 )  8,905              Total   $  ( 13,274 ) $  ( 32,713 ) $  11,221              A reconciliation of income taxes between the       statutory and effective tax is as follows:         Federal income tax (benefit) at 34%   $  ( 4,513 ) $ (11,123 ) $   3,815    Taxes on foreign loss below U.S. rate    (12,796 )  (806 )  (3,817 )  Changes in valuation allowance    14,639    2,304    281    Other    (179 )  (573 )  155              Total effective tax: 22%, 31%,and 4%   $  (2,849 ) $ (10,198 ) $     434                  As of December 31,   2005 2004               Deferred tax assets:              The components of deferred tax assets and liabilities are as    follows:       Net operating loss and capital loss carryforwards   $  35,925   $  25,439       Unrealized losses on investments    1,132    4,321       Foreign tax credits carryforwards    5,456    5,456        Total deferred assets    42,513    35,216       Valuation allowance    (26,832 )  (12,193 )      Net deferred tax assets    15,681    23,023             Deferred tax liabilities:       Tax on equity in earnings of affiliates    2,470    3,356        Cost basis of investment greater than tax bases    -    10,877        Other    840    1,653        Total deferred tax liability    3,310    15,886             Net deferred tax assets    $  12,371   $   7,137          55             As of December 31, 2005, valuation allowance is provided against tax benefits on foreign net operating loss carryforwards of $26.8 million.           As of December 31, 2005, the Company has foreign tax credits of $5.5 million that will expire in the years 2009 through 2014.           As of December 31, 2005, the Company has U.S. Federal net operating loss carryforwards of approximately $29.5 million that will expire in the years 2021 through 2024. The utilization of net operating loss carryforwards may be subject to substantial annual limitations if there has been a significant “change in ownership”. Such a “change in ownership”, as described in Section 382 of the Internal Revenue Code, may substantially limit the Company’s utilization of the net operating loss carryforwards.     Note 11   –   Investments in Affiliates               The companies accounted for by the equity method and the Company’s share of equity in those investees are:     As of December 31,   2005 2004   % %           Bay Heart Limited      37    37    Carmel Containers Systems Limited    21 .8  21 .8  Coral World International Limited    50    50    CUTe Ltd.    --    20    Epsilon Investment House Ltd.    --    20    Hod Hasharon Sport Center (1992) Limited       Partnership    50    50    Ophir Holdings    42 .5  42 .5  Ophirtech Ltd.    --    42 .5  Renaissance Investment Company Ltd.    --    20    Trinet Investment in High-Tech Ltd.    37 .5  37 .5  Trinet Venture Capital Ltd.    50    50              Combined summarized financial information for the above companies is as follows:     Fiscal Year Ended December 31,   2005 2004 2003   (U.S. Dollars in thousands)             Revenues     $ 140,197   $ 129,091   $ 119,323    Gross profit    30,918    22,200    22,201    Net income    15,803    8,184    9,858        As of December 31,   2005 2004   (U.S. Dollars in thousands)           Property and equipment     $  65,931   $  80,927    Other assets    134,700    173,579          Total assets   $ 200,631   $ 254,506             Total liabilities, including bank borrowings   $ 143,217   $ 162,430          56       Note 12   –   Other Income.               Other revenues for each of the years ended December 31, 2005, and 2004 include accrual of guaranteed dividend payments from Motorola relating to the investment in MIRS of $ 7.1 million and $2.2 million from member subscription in the Country Club for 2005 (2004 – $2.2 million).     Note 13   –   Operating Segments Information               SFAS 131 “Disclosure about Segments of an Enterprise and Related Information” establishes annual and interim reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. Segment information presented below results primarily from operations in Israel.     Fiscal Year Ended December 31,   2005 2004 2003   (U.S. Dollars in thousands)             Revenues:                   Finance   $   12,475   $   16,379   $   38,368    Real estate income    9,244    8,897    8,958    Leisure-time    2,208    2,233    2,037    Intercompany adjustments    (63 )  (76 )  (75 )            23,864    27,433    49,288    Equity in earning of affiliates    6,666    4,031    2,526         Total   $   30,530   $   31,464   $   51,814                       Equity in Earnings (losses) of Affiliates:     Finance   $      106   $    1,523   $      358    Real estate rental    5,448    590    2,813    Leisure-time    1,112    1,122    967    Others    --    796    (1,612 )                    Total   $    6,666   $    4,031   $    2,526                       Interest Income:       Finance   $    1,586   $      613   $      538      Intercompany adjustments    (19 )  (23 )  (30 )                  Total   $    1,567   $      590   $      508                         Interest Expense:       Finance   $    4,278   $    4,246   $    4,875      Real estate rental    836    540    605      Leisure-time    162    117    82      Intercompany adjustments    (19 )  (23 )  (31 )                  Total   $    5,257   $    4,880   $    5,531                         Pretax Operating (Loss) Income:       Finance   $  (20,472 ) $  (36,192 ) $    9,765      Real estate rental    287    (963 )  (1,299 )    Leisure-time    245    411    229              (19,940 )  (36,744 )  8,695      Equity in earning of affiliates    6,666    4,031    2,526                    Total   $  (13,274 ) $  (32,713 ) $   11,221                         Income (Benefit) Tax Expense:       Finance   $   (2,970 ) $  (10,558 ) $      422      Real estate rental    63    334    --      Leisure-time    58    26    12                    Total   $   (2,849 ) $  (10,198 ) $      434                         Net Income:       Finance   $  (17,396 ) $  (24,111 ) $    9,701      Real estate rental    5,672    (707 )  1,514      Leisure-time    1,299    1,507    1,184      Others    --    796    (1,612 )            (10,425 )  (22,515 )  10,787      Minority interest, net    (4,467 )  (4,130 )  1,940                  Total   $   (5,958 ) $  (18,385 ) $    8,847                         Total Assets for year end:       Finance   $  118,458   $  225,577   $  274,948      Real estate rental    76,117    64,128    67,577      Leisure-time    17,568    17,426    16,100      Intercompany adjustments    (1,239 )  (2,184 )  (4,258 )                  Total   $  210,904   $  304,947   $  354,367                         Investments in Affiliates for year end:       Finance   $    8,360   $    3,389   $    3,499      Real estate rental    (3,456 )  10,987    8,662      Leisure-time    15,066    14,479    13,395           Total   $   19,970   $   28,855   $   25,556                         Capital Expenditures:      Finance   $  --   $        5   $      246      Real estate rental    9,794    774    425      Leisure-time    90    296    152                Total   $    9,884   $    1,075   $      823                         Depreciation, Amortization and Impairment:       Finance   $   14,039   $    38,984   $   13,723      Real estate rental    (160 )  (111 )  (117 )    Leisure-time    207    162    134                Total   $   14,086   $    39,035   $   13,740                57             Corporate office expense is principally applicable to the financing operation and has been charged to that segment above. Revenues and pretax operating (loss) income above exclude equity in (losses) earnings of affiliates.           The real estate rental segment consists of rental property owned in Israel and the United States leased to unrelated parties, and operations of Am-Hal Ltd., a wholly-owned subsidiary which owns and operates a chain of senior citizens facilities located in Israel.           The leisure-time segment consists of Coral World International Limited (marine parks located around the world) and Country Club Hod Hasharon Sport Center and Kfar Saba, the Company’s 51%-owned subsidiary located in Israel.   58       Note 14   –   Disclosures about Fair Value of Financial Instruments               The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:     (a)   Cash and Cash Equivalents               For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value (see  Note 1(k)).     (b)   Deposits, Notes and Loans Receivable               The fair value of these deposits, notes and loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.     (c)   Investments               For financial instruments with maturities between 91 days and 1 year, and all marketable securities, the carrying amount is a reasonable estimate of fair value.     (d)   Financial Instruments               The fair value of the financial instruments included in other assets, accounts payable, and accrued expenses presented at a fair value.      (e)   Commitments               Due to the relatively short term of commitments discussed in Note 15, the contract value is considered to be at fair value.     (f)   Financial Assets and Financial Liabilities               The fair value of notes and loans payable, deposits payable and debentures outstanding is estimated by discounting the future cash flows using the current rates offered by lenders for similar borrowings with similar credit ratings and for the same remaining maturities.     As of December 31,   2005 2004   Carrying Amount Fair Value Carrying Amount Fair Value   (U.S. Dollars in thousands)         Financial assets:                           Cash and cash equivalents   $  24,314   $  24,314   $  17,618   $  17,618    Deposits, notes and loans receivable    343    343    3,534    3,525    Investments    38,575    38,575    50,433    50,433              $  63,232   $  63,232   $  71,585   $  71,576               Financial liabilities:         Notes and loans payable   $  50,366   $  50,362   $ 118,760   $ 117,743    Debentures outstanding    -    -    2,036    2,036              $  50,366   $  50,362   $ 120,796   $ 119,779            59       Note 15   –   Commitments and Contingencies           (a)  The combined minimum annual lease payments on Ampal’s corporate office and           its subsidiary Country Club Kfar Saba Ltd. in 2005 were $ 0.3 million.           The lease of the corporate offices expires in 2009 and the Kfar Saba lease           expires in 2038. In the years 2006-2010, the combined annual lease payments on           those premises will be in an aggregate amount of $ 1.4 million, and           thereafter, an amount totaling $4.9 million.          (b)  AM-Hal provided a lien to Bank Hapoalim on AM-Hal properties in Rishon –          Le Zion and Hod Hasharon to guarantee a loan of $10.4 million.          (c)  The Company has issued guarantees on bank loans to its investees and           subsidiaries totaling $10.3 million as follows:          (1)  The Company provided a $3.6 million guarantee to AM–Hal tenants.           (2)  The Company provided a $5.8 million guarantee on indebtedness incurred by Bay           Heart.           (3)  The Company provided a $0.9 million guarantee to Galha (1960) Ltd, for the           payment of the Company’s subsidiary of a final judgment, if entered against           the Company’s subsidiary. (See below)           (d)  The Company made a commitment to invest $2.8 million in Star II (2000 L.P.).                   (e)  Legal Proceedings:          Ampal Communications L.P.          1.        On May 10, 2004, Ampal Communications L.P., a limited partnership           controlled by Ampal and in which Ampal holds a 75% equity interest, filed a           claim in the Tel-Aviv District Court against Motorola Communications Israel           Ltd., Motorola Israel Ltd., Elisha Yanai, Peter Brum, Rami Guzman, Nathan           Gidron, Shimon Tal and MIRS Communications Ltd. (collectively, the           “Defendants”), for injunctive and declaratory relief as described           below. The claim is in connection with the exploitation by the defendants of           Ampal Communications’ minority rights by virtue of its 33% holding in MIRS           Communications Ltd.            Ampal Communications L.P. requested the Court to issue relief as follows:           A.  Declaring that the business of MIRS Communications Ltd. is conducted in such a           way as to be prejudicial to the rights of Ampal Communications L.P. as a           minority share holder;           B.  Appointing an appraiser to conduct a valuation of MIRS Communications Ltd. and           Ampal Communications L.P.‘s holdings therein, which will encompass a review           of the way MIRS Communications Ltd. conducts its business, including a review of           the related party transactions between MIRS Communications Ltd. and Motorola           Israel Ltd. and/or any other of the Defendants;           C.  Instructing each of the Defendants to acquire and purchase from Ampal           Communications L.P. the shares it holds in MIRS Communications Ltd. at the           highest of the following prices:           (1)  based on a company valuation of MIRS Communications Ltd. as presented to Ampal           Communications L.P. by Motorola prior to the signing of the Share Purchase           Agreement for MIRS Communications Ltd.; or       60         (2)  based on the amount paid by Ampal Communications L.P. for its share holding in           MIRS Communications Ltd. plus linkage to the Israeli consumer index and           interest; or           (3)  based on the company valuation that will be determined by the valuation           specified in Section B above, excluding any material negative effect           brought about by the Defendants’ omissions and/or negligence in their           management of MIRS Communications Ltd., all as may be assessed and computed by           the appraiser specified in Section B above;           D.  Determining that each of the individual Defendants, as officers in MIRS           Communications Ltd., has violated his respective fiduciary obligations towards           Ampal Communications L.P. as a minority shareholder in MIRS Communications Ltd.;           and           E.  Declaring that the Share Purchase Agreement pursuant to which Ampal           Communications L.P. acquired its shareholding in MIRS Communications Ltd. and           the Shareholders Agreement in respect thereof, are void.           2.  On May 24, 2004 and on May 31, 2004 the Defendants requested the district court           to strike out the claim in limine, on the grounds that Ampal had allegedly not           paid sufficient fees when filing the claim, and further requested an extension           of the time for filing statements of defense until after the district court had           reached a decision regarding the request to strike out the claim. Ampal and the           Defendants filed various responses and on June 30, 2004, the district court           requested the Attorney General to furnish an opinion regarding the           Defendants’ request before issuing its own decision. On October 11, 2004           the Attorney General furnished its opinion that supported the Defendants’          request that Ampal should pay the fees calculated on the basis of the value of           the requested remedies in the claim.            On November 10, 2004 Ampal filed its response. The Court also decided that the statements of defense should be filed 10 days after it issues its decision regarding the striking out of the claim.          3.  On March 1, 2005, Ampal requested the district court to enter judgment against           Peter Brum on the grounds that he failed to file a defense to the Company’s           claim. On March 15, 2005, the district court granted Ampal’s request and           entered judgment against Peter Brum. On March 17, 2005, the district court           ordered Mr. Brum to acquire and purchase from Ampal the shares it holds in MIRS           for a total company valuation of $ 765,998,000, which is the highest of the           prices set forth in the complaint. The litigation with regard to the other           defendants is ongoing. Peter Brum, Motorola and MIRS have appealed the district           court’s judgment on numerous grounds. Ampal has filed responses to the           appeal.           4.  On August 30, 2005, the Company, through Ampal Communications L.P. entered into           a Stock Purchase and Indemnification Agreement, dated as of August 30, 2005, by           and among Motorola Israel Ltd., Ampal Communications L.P. and MIRS (the           “Agreement”) to sell Motorola Israel Ltd. all of its holdings of MIRS.           In connection with the closing of the transactions contemplated by this           Agreement the existing lawsuit among the parties and other relating to MIRS was           dismissed.           5.  On October 3, 2005 the Company, through Ampal Communications L.P., completed           the sale to Motorola Israel Ltd. of all of its holdings of MIRS pursuant to the           Agreement. In connection with the sale of its holdings of MIRS, Ampal           Communications L.P. received approximately US $89 million of total proceeds,           composed of $67.7 million for the purchase price and an additional $ 21.3           million related to guaranteed dividend payments. Approximately $ 74.0 million of           the proceeds was used to repay all outstanding debt to banks incurred in           connection with making the MIRS investment, and the Company received US$ 15.0           million ($11.0 million after the deduction of minority interest) of net proceeds           from the sale.       61          Galha            On January 1, 2002, Galha (1960) Ltd. (“Galha”) filed a suit against the Company and other parties, including directors of Paradise Industries Ltd. (“Paradise”) appointed by the Company, in the Tel Aviv District Court, in the amount of NIS 10,249,609 ($2.2 million). Galha claimed that the Company, which was a shareholder of Paradise, and another shareholder of Paradise, misused funds that were received by Paradise from an insurance company for the purpose of reconstructing an industrial building owned by Galha and used by Paradise which burnt down. Paradise is currently involved in liquidation proceedings. Ampal issued a guarantee in favor of Galha for the payment of an amount of up to NIS 4,022,085 ($873,800) if a final judgment against the Company will be given.           On May 26, 2003 the Company and the directors of Paradise appointed by the Company filed a third party claim against Arieh Israeli Insurance Company Ltd., in the Tel Aviv District Court, claiming that, to the extent the court decides that the directors of Paradise appointed by the Company will have to pay any amounts to Galha, Arieh will pay such amounts on behalf of the directors in accordance with the Directors and Officers insurance policy that the Company had at that time with Arieh. Arieh filed a statement of defense and stated that the policy does not cover the claim. At this stage, the Company cannot estimate the impact this claim will have on it.        Note 16   –   Subsequent Events            None        Note 17  –    Quarterly Financial Information (Unaudited)       The table below provides the results of comprehensive income (loss) including the sale of available for sale securities. In the previously filed quarterly reports, the item “Sale of available for sale securities” was not included in the Statement of Comprehensive Income (Loss). The table below reflects the corrected comprehensive income (loss) figures.   Consolidated Statements of Comprehensive Income (loss) is presented for the following periods in 2005:     Three Months endedMarch 31, 2005 Six Months Ended June 30, 2005 Nine Months EndedSeptember 30, 2005   (U.S. Dollars in thousands)   Previously reported Restated Previously reported Restated Previously reported Restated                  Net income  (loss)     $   6,728   $   6,728   $   4,217   $   4,217   $  (6,413 ) $  (6,413 )          Other comprehensive (loss) income, net of tax:    Foreign currency translation adjustment    (179 )  (179 )  (1,383 )  (1,383 )  408    408    Unrealized gain (loss) on securities    (733 )  (733 )  (780 )  (780 )  (573 )  (573 )  Sale of available for sale securities    -    (4,166 )  -    (4,166 )  -    (4,166 )          Other comprehensive (loss) income    (912 )  (5,078 )  (2,163 )  (6,329 )  (165 )  (4,331 )               Comprehensive income (loss)   $   5,816   $   1,650   $   2,054   $  (2,112 ) $  (6,578 ) $ (10,744 )            62
None.
Disclosure Controls and Procedures    The Company’s management with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.   Internal Control Over Financial Reporting    There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
None      63      PART III
MANAGEMENT           The following table sets forth certain information regarding Ampal’s directors and executive officers as of March 6, 2006:    Name Position               Yosef A. Maiman Chairman of the Board of Directors and Director  Jack Bigio (1) President, Chief Executive Officer and Director  Leo Malamud(1) Director  Dr. Joseph Yerushalmi(1) Director  Yehuda Karni(1) (2) (3)(4) Director  Eitan Haber(2) (3)(4) Director  Menahem Morag(2) (3)(4) Director  Irit Eluz CFO, Senior Vice President - Finance and Treasurer  Yoram Firon Vice President-Investments and Corporate Affairs and Secretary  Amit Mantsur Vice President-Investments  Giora Bar-Nir Vice President - Accounting and Controller              The numbers listed below, which follow the names of some of the foregoing directors, designate committee membership:       (1)  Member of the Executive Committee of the Board which meets as necessary between           regularly scheduled Board meetings and, consistent with certain statutory           limitations, exercises all the authority of the Board.          (2)  Member of the Audit Committee of the Board which reviews functions of the           outside auditors, auditors’ fees and related matters. Mr. Karni is the           Chairman of the Audit Committee of the Board.          (3)  Member of the Stock Option and Compensation Committee of the Board.          (4)  Member of the Special Committee of the Board.              In 2005, the Board met seven times and acted 4 times by written consent; the Executive Committee met two times and did not act by written consent; the Audit Committee met five times and did not act by written consent. The Stock Option and Compensation Committee met one time and did not act by written consent. The Special Committee met two times and did not act by written consent. All directors attended more than 75% of the aggregate of (1) the total number of Board meetings held during the period in 2005 for which such individual was a director and (2) the total number of meetings held by all committees of the Board on which such individual served in 2005 (during the period of such service). Each director of the Board is elected for a one year term and serves until his or her successor is duly elected and qualified.           The following sets forth the ages of all of the above-mentioned directors and executive officers, all positions and offices with Ampal or its subsidiaries held by each director and officer and principal occupations during the last five years.   64             YOSEF A. MAIMAN, 60, has been the Chairman of the Board of Ampal since April 25, 2002. Mr. Maiman has been President and Chief Executive Officer of Merhav M.N.F. Ltd. (“Merhav”), one of the largest international project development companies based in Israel, since its founding in 1975. Mr. Maiman is also the Chairman of the Board of Directors of Channel Ten, a commercial television station in Israel, a director of Eltek, Ltd. (“Eltek”), a developer and manufacturer of printed circuit boards, a member of the Board of Directors of the Middle East Task Force of the New York Council on Foreign Relations and Honorary Consul to Israel from Peru. Mr. Maiman is also member of the Board of Trustees of the Tel Aviv University, Chairman of the Israeli Board of the Jaffee Center for Strategic Studies at Tel Aviv University, a member of the Board of Governors of Ben Gurion University, and the Chairman of the Board of Trustees of the International Policy Institute for Counter Terrorism.           JACK BIGIO, 40 has been the President and Chief Executive Officer of Ampal since April 25, 2002, and a director of Ampal since March 6, 2002. From 1996 until April 2002, Mr. Bigio served as Senior Vice President – Operations and Finance of Merhav. Mr. Bigio is also a director of Eltek, a member of the Board of Israel-America Chamber of Commerce & Industry and a member of Young Presidents’ Organization.           LEO  MALAMUD,  54, has been a director  of Ampal  since  March 6, 2002.  Since  1995,  Mr.  Malamud is Senior Vice President of Merhav.  Mr. Malamud is also a director of Eltek.           Dr.           JOSEPH YERUSHALMI, 68, has been Senior Vice President – Head of Energy and           Infrastructure Projects of Merhav since 1995. He has been a director of Ampal           since August 16, 2002.            YEHUDA KARNI, 77, was a senior partner in the law firm of Firon Karni Sarov & Firon, from 1961 until his retirement in 2000. He has been a director of Ampal since August 16, 2002.           EITAN HABER, 66, was the Head of Bureau for the former Prime Minister of Israel, Yitzhak Rabin, from July 1992 until November 1995. Since 1996, Mr. Haber has been the President and Chief Executive Officer of Geopol Ltd., which represents the Korean conglomerate Samsung Aircraft and Industries in Israel and the Middle East; Kavim Ltd., a production and project development company; Mr. Haber is a member in the Board of Directors of Africa Israel Ltd. Mr. Haber is also a member of various non-profit organizations. He has been a director of Ampal since August 16, 2002.           MENAHEM MORAG, 55, has been a director of Ampal since January 27, 2004. From 1996 to 1999 Mr. Morag was the Head of Finance and Budget at the Israeli Prime Minister’s office in Tel Aviv. From 1999 to 2001, Mr. Morag was the Controller and Ombudsman at the Israeli Prime Minister’s office in Tel Aviv. From 2001 to 2003, Mr. Morag was the Head of Human Resources Department at the Israeli Prime Minister’s office in Tel Aviv. Since, 2003, Mr. Morag has been the Head of the Council of the Pensioners Association of the Israeli Prime Minister’s office in Tel Aviv, director in Palram Industries since 2004 and since 2005 he is the CEO of Keren-Shemesh Foundation for the Encouragement of Young Entrepreneurs.           IRIT ELUZ, 39, has been the Chief Financial Officer and Senior Vice President – Finance and Treasurer since October 2004. From May 2002 through October 2004 Ms. Eluz was Chief Financial Officer and Vice President – Finance and Treasurer. From January 2000 through April 2002, Ms. Eluz was the Associate Chief Financial Officer of Merhav. From June 1995 through December 1999, Ms. Eluz was the Chief Financial Officer of Kamor Group.           YORAM FIRON, 37, has been Secretary and Vice President – Investments and Corporate Affairs since May 2002. During the preceding five years, Mr. Firon was a Vice President of Merhav and a partner in the law firm of Firon Karni Sarov & Firon.           AMIT MANTSUR, 36, has been Vice President – Investments since March 2003. From September 2000 through December 2002, Mr. Mantsur served at Alrov Group as Strategy & Business Development Manager. From February 1997 through September 2000, Mr. Mantsur was a projects manager at the Financial Advisory Services of KPMG Somekh Chaikin.   65             GIORA BAR-NIR, 49, has been Vice-President – Accounting and Controller Since October 2004. From March 2002 through October 2004 Mr. Bar-Nir has been the Controller. During the preceding five years, Mr. Bar-Nir was the Controller of the Israeli subsidiaries of Ampal.   AUDIT COMMITTEE           The Company has an Audit Committee of the Board consisting of Messrs. Karni, Haber and Morag, each of whom is an independent director as defined under the rules of the National Association of Securities Dealers, Inc. and the rules promulgated by the Securities and Exchange Commission. The Board has determined that Mr. Morag is an “audit committee financial expert” for purposes of the rules promulgated by the Securities and Exchange Commission.   SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE           Section 16(a) of the Securities Exchange Act of 1934, as amended, requires Ampal’s executive officers and directors, and persons who own more than 10% of a registered class of Ampal’s equity securities, to file with the Securities and Exchange Commission initial statements of beneficial ownership (Form 3), and statements of changes in beneficial ownership (Forms 4 and 5), of Class A Stock of Ampal. To the Company’s knowledge, based solely on its review of the copies of such forms received by it, all filing requirements applicable to its executive officers, directors and greater than 10-percent stockholders were complied with.   CODE OF ETHICS           The Company has adopted a code of ethics (as defined in the rules promulgated under the Securities Exchange Act of 1934) that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer, or person performing similar functions. A copy of the Company’s code of ethics is available on the Company’s website at www.ampal.com (the “Company’s Website”).   CODE OF CONDUCT           The Company has adopted a code of conduct that applies to all of the Company’s employees, directors and officers. A copy of the code of conduct is available on the Company’s Website.   66
Summary Compensation Table           The table below presents information regarding remuneration paid for services to Ampal and its subsidiaries by the executive officers named below during the three fiscal years ended December 31, 2005, 2004 and 2003.    Name and Principal Position Year Salaries Bonus Other Annual Compensation(9) Long-Term Compensation Number of Securities Underlying Options (10) All Other Compensation (U.S. Dollars)(11)  ( U . S .  D o l l a r s )                           Yosef A. Maiman (1)(12)     2005      581,613    310,208    299    -    7,282    Chairman of the Board   2004    606,409    364,604    6,091    -    2,143        2003    506,849    155,953    25,570    -    2,002         Jack Bigio (2)(12)   2005    443,176    208,484    40,257    -    111,235    President and CEO   2004    420,064    252,564    54,943    280,000    102,131        2003    257,547    106,189    71,777    -    88,389         Irit Eluz (3)(12)   2005    242,757    423,599    25,525    -    57,374    CFO - SVP Finance &   2004    219,980    132,332    32,732    280,000    49,349    Treasurer   2003    183,959    55,698    39,631    -    42,000         Yoram Firon (4)(12)   2005    185,345    107,767    25,771    -    45,346    Secretary, Vice   2004    159,500    48,674    26,491    190,000    35,086    President and   2003    133,138    14,063    30,261    -    29,756    Corporate Affairs         Amit Mantsur(5)   2005    129,915    43,308    13,187    -    32,911    Vice President -   2004    120,706    51,068    11,491    15,000    31,130        Investments   2003    108,853    -    12,097    58,000    28,335         Shlomo Shalev (6)(7)(8)   2005    180,385    96,688    18,930    -    300,601    Senior Vice President   2004    188,105    61,145    24,617    30,000    46,803    investment   2003    167,093    34,254    33,048    -    41,712        (1)   Mr. Maiman has been employed by Ampal since April 25, 2002 as Chairman of the                Board.       (2)   Mr. Bigio has been employed by Ampal since April 25, 2002 as President and CEO.       (3)   Ms. Eluz has been employed by Ampal since April 25, 2002.       (4)   Mr Firon has been employed by Ampal since April 25, 2002.       (5)   Mr. Mantsur has been employed by Ampal since February 2, 2003.       (6)   Mr. Shalev served as Senior Vice President Investment from May 21, 2002 until                November 30, 2005.       (7)   Mr. Shalev retired on November 30, 2005, the amounts include final account                settlement.       (8)   Mr. Shalev exercised 73,125 options on December 7, 2005.       (9)   Consists of amounts reimbursed for the payment of taxes.       (10)   Represents the number of shares of Class A Stock underlying options granted to                the named executive officers.       (11)   Comprised of Ampal (Israel’s) contribution pursuant to : (1) Ampal                (Israel’s) Pension Plan and (ii) Ampal (Israel’s) education fund and                (iii) use of car and (iv) use of mobile (v) final account settlement.       (12)   Eligible to receive an additional payment of up to six months salary (i) in the                event of a change of control of the Company and (ii) such executive                officer’s employment is terminated within six months from the date of the                change of control of the Company.      67     Fiscal Year-End Option Values     Number of Securities Underlying Unexercised Options at Fiscal Year End 2005 Unrealized Value of In-the-Money Options (U.S. Dollars)   Exercisable Unexercisable Exercisable Unexercisable                     Yosef A. Maiman      203,125    46,875   $ 633,750   $ 146,250    Jack Bigio    191,875    238,125   $ 625,250   $ 822,750    Irit Eluz    133,781    224,719   $ 443,998   $ 780,923    Yoram Firon    103,156    155,344   $ 339,898   $ 538,823    Amit Mantsur    43,625    29,375   $ 160,264   $ 106,256      Option Grants In Last Fiscal Year   No stock options were granted to purchase our Class A Stock to our named executive officers during fiscal year ended December 31, 2005.   Other Benefits           Ampal previously maintained a money purchase pension plan (“Pension Plan”) for all full-time employees of Ampal except non-resident aliens outside the United States. Pursuant to the cessation of the Company’s U.S. operations, the Ampal-American Israel Corporation Money Purchase Pension Plan and the Ampal-American Israel Corporation Savings Plan were terminated effective December 31, 2004.   Compensation of Directors           Directors of Ampal (other than Mr. Maiman and Mr. Bigio) received $1,500 per Board meeting attended. The Chairman of the Board receives $2,000. Directors of Ampal also receive the same amount for attendance at meetings of committees of the Board, provided that such committee meetings are on separate days and on a day other than the day of a regularly scheduled Board meeting.           On October 28, 2004, the Board formed a Special Committee of the Board composed of Mr. Yehuda Karni, Mr. Eitan Haber and Mr. Menahem Morag, each of whom is an independent director.           The Board appointed the Special Committee of independent directors to consider alternatives available to the Company to maximize shareholder value. The Special Committee was formed in response to a suggestion from Mr. Yosef A. Maiman, Chairman of the Board and controlling stockholder, that he is reviewing his alternatives with regard to his investment in the Company.           In connection with the formation of this Special Committee, the Company entered into an Indemnification and Compensation Agreement with each of Messrs. Karni, Haber and Morag. In consideration for serving as a member of the Special Committee, each director shall receive from the Company a fee of $35,000 payable in seven equal monthly installments beginning on October 28, 2004. Each director shall also be entitled to receive from the Company a fee of $1,500 per each meeting of the Special Committee he attends. In addition, the Company has agreed to indemnify and hold harmless each Director with respect to his service on, and any matter or transaction considered by, the Special Committee to the fullest extent authorized or permitted by law. A copy of the form of this Indemnification and Compensation Agreement is attached as Exhibit 10j to this annual report on Form 10-K.   68             The following table sets forth certain information regarding stock options granted to purchase our Class A Stock to our directors during the three fiscal years ended December 2005, 2004 and 2003.     2005 2004 2003                       Jack Bigio (1)      -    280,000    -    Eitan Haber (2)    45,000    -    -    Yehuda Karni (2)    45,000    -    -    Menahem Morag (3)    45,000    15,000    -      (1)           Since March 6, 2002.  (2)           Since August 16, 2002 .  (3)           Since March 24, 2004.   Stock Option Plan           In March 1998, the Board approved a Long-Term Incentive Plan (“1998 Plan”) permitting the granting of options to all employees, officers, directors and consultants of the Company and its subsidiaries to purchase up to an aggregate of 400,000 shares of Class A Stock. The 1998 Plan was approved by a majority of the Company’s shareholders at the June 19, 1998 annual meeting of shareholders. The 1998 Plan remains in effect for a period of ten years. As of December 31, 2005, 30,000 options of the 1998 Plan are outstanding.           On February 15, 2000, the Stock Option Committee approved a new Incentive Plan (“2000 Plan”), under which the Company has reserved 4 million shares of Class A Stock, permitting the granting of options to all employees, officers and directors. The 2000 Plan was approved by the Board of Directors at a meeting held on March 27, 2000 and was approved by a majority of the Company’s shareholders at the June 29, 2000 annual meeting of shareholders. The 2000 Plan remains in effect for a period of ten years. As of December 31, 2005, 1,994,500 options of the 2000 Plan are outstanding.           The options granted under the 1998 Plan and the 2000 Plan (collectively, the “Plans”) may be either incentive stock options, at an exercise price to be determined by the Stock Option and Compensation Committee (“the Committee”) but not less than 100% of the fair market value of the underlying options on the date of grant, or non-incentive stock options, at an exercise price to be determined by the Committee. The Committee may also grant, at its discretion, “restricted stock,” “dividend equivalent awards,” which entitle the recipient to receive dividends in the form of Class A Stock, cash or a combination of both and “stock appreciation rights,” which permit the recipient to receive an amount in the form of Class A Stock, cash or a combination of both, equal to the number of shares of Class A Stock with respect to which the rights are exercised multiplied by the excess of the fair market value of the Class A Stock on the exercise date over the exercise price. The options granted under the Plans were granted either at market value or above.           Under each of the Plans, all granted but unvested options become immediately exercisable upon the occurrence of a change in control of the Company. On April 25, 2002, the controlling shareholder of the Company, Rebar Financial Corp., sold all of its stock in the Company to Y.M. Noy Investments Ltd. Accordingly, all options granted but unvested under the Plans were immediately exercisable.   69             The Company accounts for all plans under APB Opinion No. 25, under which no compensation costs were incurred in the years ended December 31, 2003, 2004 and 2005. If compensation cost for the options under the above Plans had been determined in accordance with SFAS No. 123, the Company’s net income (loss) would have been ($6,832) million, ($18,954) million and $8,351 million, for the years 2005, 2004 and 2003, respectively.   COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION           The current members of the Stock Option and Compensation Committee are Mr. Yehuda Karni, Mr. Eitan Haber and Mr. Menahem Morag, none of whom is an officer or employee or former officer or employee of the Company.  During 2005, no executive officer of the Company served on the Stock Option and Compensation Committee, or the Board of Directors of another entity whose executive officer(s) served on the Company’s Stock Option and Compensation Committee of the Board of Directors.
Equity Compensation Plan Information(1)  Plan category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))   (a) (b) (c)             Equity compensation                      plans approved by        security holders    2,024,500    3.37    2,375,500 (2)       Equity compensation        plans not approved        by security holders    N/A    N/A    N/A                  Total    2,024,500    3.37    2,375,500          (1)  All information provided as of December 31, 2005.          (2)  The number of securities remaining available for future issuance under 1998 Plan                is 370,000. The number of securities remaining available for future issuance                under 2000 Plan is 2,005,500.      70     PRINCIPAL SHAREHOLDERS OF AMPAL           The following table sets forth information as of March 6, 2006, as to the holders known to Ampal who beneficially own more than 5% of the Class A Stock, the only outstanding series of voting securities of Ampal. For purposes of computation of the percentage ownership of Class A Stock held by such stockholders set forth in the table, conversion of any 4% Cumulative Convertible Preferred Stock (the “4% Preferred Stock”) and 6 1/2% Cumulative Convertible Preferred Stock (the “6 1/2% Preferred Stock”) owned by such beneficial owner has been assumed, without increasing the number of shares of Class A Stock outstanding by amounts arising from possible conversions of convertible securities held by shareholders other than such beneficial owner. As of March 6, 2006, there were 20,157,772 (not including treasury shares) shares of Class A Stock of Ampal outstanding. In addition, as of March 6, 2006, there were 501,227 non-voting shares of 6 1/2% Preferred Stock outstanding (each convertible into 3 shares of Class A Stock) and 110,296 non-voting shares of 4% Preferred Stock outstanding (each convertible into 5 shares of Class A Stock).   Security Ownership of Certain Beneficial Owners    Name and Address of Beneficial Owner Title of Class Number of Shares and Nature of Beneficial Ownership Percent of Outstanding Shares of Class A Stock                       Y.M. Noy Investments Ltd., of 33                    Havazelet Hasharon St., Herzliya,    Israel   Class A Stock    11,750,132 (1)  58.29 %       Yosef A. Maiman    Y.M. Noy Investments Ltd., of 33    Havazelet Hasharon St., Herzliya,Israel   Class A Stock    11,968,882 (1)(2)  58.74 %       Ohad Maiman    Y.M. Noy Investments Ltd., of 33    Havazelet Hasharon St., Herzliya,Israel   Class A Stock    11,750,132 (1)  58.29 %       Noa Maiman    Y.M. Noy Investments Ltd., of 33    Havazelet Hasharon St., Herzliya,Israel   Class A Stock    11,750,132 (1)  58.29 %        (1)  Consists of 11,750,132 shares of Class A Stock held directly by Y.M. Noy                Investments Ltd. Yosef A. Maiman owns 100% of the economic shares and one-third                of the voting shares of Y.M. Noy Investments Ltd.. In addition, Mr. Maiman holds                an option to acquire the remaining two-thirds of the voting shares of Y.M. Noy                Investments Ltd. (which are currently owned by Ohad Maiman and Noa Maiman, the                son and daughter, respectively, of Mr. Maiman).          (2)  Includes 218,750 shares of Class A Stock underlying options which are currently                exercisable by Mr. Maiman.      71     Security Ownership of Management           The following table sets forth information as of March 6, 2006 as to each class of equity securities of Ampal or any of its subsidiaries beneficially owned by each director and named executive officer of Ampal listed in the Summary Compensation Table and by all directors and named executive officers of Ampal as a group. All ownership is direct unless otherwise noted. The table does not include directors or named executive officers who do not own any such shares:    Name Number of Shares and Nature of Beneficial Ownership of Class A Stock Percent of Outstanding Shares of Class A Stock                   Yosef Maiman      11,968,882 (1)(2)  58.74 %  Jack Bigio    236,250 (2)  1.16 %  Irit Eluz    173,688 (2)  *    Yoram Firon    131,187 (2)  *    Amit Mantsur    48,187 (2)       Leo Malamud    131,250 (2)  *    Dr. Joseph Yerushalmi    87,500 (2)  *    Eitan Haber    18,750 (2)  *    Yehuda Karni    18,750 (2)  *    Menahem Morag    13,126 (2)  *    All Directors and Executive Officers      as a Group    12,827,570 (2)  60.44 %        *  Represents less than 1% of the class of securities.          (1) Attributable to 11,750,132 shares of Class A Stock held directly by Y.M. Noy Investments Ltd. See “Security Ownership of Certain Beneficial Owners.”In addition, this represents 218,750 shares underlying options for Yosef Maiman which are presently exercisable.          (2) Represents shares underlying options which are presently exercisable or exercisable in 60 days.
The Audit Committee of Ampal has the duty and responsibility of approving all transactions between Ampal, on the one hand, and any officer, director, or affiliate thereof, on the other hand, or in which any officer, director or affiliate has a material interest. Under the rules promulgated by Nasdaq, the Audit Committee must review and approve all transactions between Ampal on the one hand and any officer, director or principal shareholder of Ampal on the other hand. The Audit Committee considers and evaluates potential related party transactions from time to time, including co-investment opportunities and other types of transactions. The Audit Committee has the authority to engage independent legal, financial and other advisors.           On December 1, 2005, the Company, through Merhav Ampal Energy Ltd., a wholly-owned subsidiary of the Company, entered into an agreement (the “Agreement”) with Merhav M.N.F. Ltd. (“Merhav”) for the purchase from Merhav of a portion of its interest in EMG.           Under the terms of the transaction, the Company acquired the beneficial ownership of 1,200 shares of EMG’s capital stock, representing a 2% beneficial ownership in EMG. The purchase price for the shares was $29,960,000. Additionally, the Company was granted the exclusive right to negotiate to acquire a substantial portion of Merhav’s remaining shares of EMG. The Company also has the right for a period of time to require Merhav to repurchase the EMG interest.           Yosef A. Maiman, the Chairman of the Board and the Company’s controlling shareholder, is the sole owner of Merhav. Because of the foregoing relationship, the Special Committee, which is identical in composition to the Audit Committee, negotiated and approved the transaction. Houlihan Lokey Howard & Zukin Financial Advisors, Inc. acted as financial advisors to the Special Committee.   72
AUDIT FEES. The fees of Kesselman & Kesselman (“Kesselman”) fees for professional services rendered for the audit of the Company’s annual financial statements for the fiscal years ended December 31, 2005 and December 31, 2004 and reviewing the financial statements included in the Company’s quarterly reports on Form 10-Q were $266,000 and $267,000, respectively.           TAX FEES. Kesselman’s tax fees for the fiscal years ended December 31, 2005 and December 31, 2004, were $209,000 and $100,000, respectively.           ALL OTHER FEES – Kesselman’s fees for other services for the fiscal years ended December 31, 2005 and December 31, 2004, were $236,000 and $42,800, respectively.           All of the services provided by our principal accounting firm described above under the captions “Audit Fees”, “Tax Fees” and “All Other Fees” were approved by our Audit Committee. The Audit Committee has determined that the rendering of professional services described above by Kesselman is compatible with maintaining the auditor’s independence.   Audit Committee Pre-Approval Policies            The Company’s Audit Committee Charter provides that the Audit Committee shall approve in advance all audit services and all non-audit services provided by the independent auditors based on policies and procedures developed by the Audit Committee from time to time. The Audit Committee will not approve any non-audit services prohibited by applicable SEC regulations or any services in connection with a transaction initially recommended by the independent auditor, the purpose of which may be tax avoidance and the tax treatment of which may not be supported by the Internal Revenue Code and related regulations.           Our Audit Committee requires that our independent auditor, in conjunction with our Chief Financial Officer, be responsible for seeking pre-approval for providing services to us and that any request for pre-approval must inform the Audit Committee about each service to be provided and must provide detail as to the particular service to be provided.   73      PART IV
(a)   The following documents are filed as a part of this report:        Page Reference              (1) Financial Statements and Supplementary Data                         Ampal-American Israel Corporation and Subsidiaries                             Report of Independent Registered Public Accounting Firm 31                            Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003 32                            Consolidated Balance Sheets as of  December 31, 2005 and 2004 33-34                            Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003.  35-36                            Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31,              2005, 2004 and 2003 37-38                            Consolidated Statements of Comprehensive Income for the years ended December 31, 2005, 2004              and 2003 39                            Notes to Consolidated Financial Statements 40-62                       Supplementary Data:                             Selected quarterly financial data for the years ended December 31, 2005 and 2004 24    74    (2)  Financial Statement Schedules  (i)  Schedule of Representative Rates of Exchange between the U.S. Dollar and New           Israeli Shekel for three years ended December 31, 2005    Representative Rates of Exchange  Between the U.S. Dollar and the New Israeli Shekel  For the Three Years Ended December 31, 2005      The following table shows the amount of New Israeli Shekels equivalent to one U.S. Dollar on the dates indicated:       2005 2004 2003                       March 31      4.361    4.528    4.687    June 30    4.574    4.497    4.312    September 30    4.598    4.482    4.441    December 31    4.603    4.308    4.379      (ii)           Consolidated financial statements filed pursuant to Rule 3-09 of Regulation S-X  Granite Hacarmel Investments Limited and Subsidiaries                         Report of Certified Public Accountants                  Consolidated Balance Sheets as at December 31, 2003 and 2002                Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001           Consolidated Statements of Shareholders' Equity for the years ended December 31, 2003, 2002 and             2001                Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001                Notes to Consolidated Financial Statements                    Ophir Holdings Ltd.                           Report of Certified Public Accountants                           Consolidated Balance Sheets as at December 31, 2005 and 2004                Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003                Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2005, 2004             and 2003                Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003                Notes to Financial Statements                         Ophirtech Ltd.                           Report of Certified Public Accountants           Consolidated Balance Sheets as at December 31, 2005 and 2004                Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003                  Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2005,             2004 and 2003                Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004             and  2003                Notes to Financial Statements           75    (iii)  Reports of Other Certified Public Accountants filed pursuant to Rule 2-05 of Regulation S-X:                             AM-HAL Ltd.                Bay Heart Ltd.            Carmel Container Systems Ltd.            Coral World International Limited            Epsilon Investment House Ltd.            Hod Hasharon Sport Center Ltd.            Hod Hasharon Sport Center (1992) Limited Partnership            Renaissance Investment Co. Ltd.          Exhibit 2 – Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession     2a.   Purchase and Sale Agreement, dated January 5, 1998, between Ampal           Communications, Inc. and Motorola Communications Israel Ltd. (Includes as           Exhibit A the form of Partnership Agreement between Ampal Communications, Inc.           and Motorola Communications Israel Ltd. and as Exhibit B the form of           Shareholders’ Agreement between Ampal Communications, Inc. and Motorola           Communications Israel Ltd.) (Filed as Exhibit 2 to a Current Report on Form 8-K,           dated February 5, 1998, and incorporated herein by reference, File No. 0-538.)      2b.   Amendment, dated January 22, 1998, to (i) Purchase and Sale Agreement, dated           January 5, 1998, between Ampal Communications, Inc. and Motorola Communications           Israel Ltd., (ii) Partnership Agreement between Ampal Communications, Inc. and           Motorola Communications Israel Ltd. and (iii) form of Shareholders’          Agreement between Ampal Communications, Inc. and Motorola Communications Israel           Ltd. (Filed as Exhibit 2a to a Current Report on Form 8-K, dated February 5,           1998, and  incorporated herein by reference, File No. 0-538.)      Exhibit 3 – Articles of Incorporation and By-Laws     3a.   Amended and Restated Certificate of Incorporation of Ampal-American Israel           Corporation, dated May 28, 1997. (Filed as Exhibit 3a. to Form 10-Q, for the           quarter ended June 30, 1997 and incorporated herein by reference, File No.           0-5380).       3b.   By-Laws of Ampal-American Israel Corporation as amended, dated February 14,           2002 (incorporated by reference to Exhibit 3b. of Ampal’s Form 10-K filed           on March 27, 2002).      Exhibit 4 – Instruments Defining the Rights of Security Holders, Including Indentures     4a.   Form of Indenture dated as of November 1, 1984. (Filed as Exhibit 4a. to           Registration Statement No. 2-88582 and incorporated herein by reference).       4b.   Form of Indenture dated as of May 1, 1986. (Filed as Exhibit 4a. to           Pre-Effective Amendment No. 1 to Registration Statement No. 33-5578 and           incorporated herein by reference).      76     Exhibit 10 – Material Contracts     10a.   Agreement, dated March 22, 1993, between the Investment Company of Bank           Leumi, Ltd., and Ophir Holdings Ltd., Mercazim Investments Ltd., Diur B.P. Ltd.           and Mivnat Holdings Ltd. (Filed as Exhibit 10.4 to Pre-Effective Amendment No. 1           to Registration Statement No. 33-51023 and incorporated herein by reference).       10b.   Agreement, dated March 30, 1994, between Poalim Investments Ltd., Ampal           (Israel) Ltd. and Ampal Industries (Israel) Ltd. (Translation). (Filed as           Exhibit 10l, to Form 10-K for the fiscal year ended December 31, 1994 and           incorporated herein by reference, File No. 0-538).       10c.   Loan Agreement, dated April 27, 1998, between Bank Hapoalim Ltd. and Ampal           Communications Limited Partnership (Filed as Exhibit 10.1 to Report on Form 10-Q           for the quarter ended June 30, 1998, File No. 0-538).       10d.   Form of Loan Agreement between Ampal Communications Limited Partnership and           Bank Leumi Le-Israel B.M. Filed as Exhibit 10.2 to Report on Form 10-Q for the           quarter ended June 30, 1998, File No. 0-538).       10e.   Sale and Purchase Agreement, dated November 8, 2000, between Ampal Realty           Corporation and Second 800 LLC. (filed as Exhibit 10I  to Form 10-K for the fiscal year ended December 31, 2002, File No. 000-00538).      10f.   The Company’s 1998 Long-Term Incentive Plan (filed as Exhibit A to the           Company’s Proxy Statement for the 1998 Annual Meeting of Shareholders).*       10g.   The Company’s 2000 Incentive Plan (filed as an exhibit to the           Company’s Proxy Statement for the 2000 Annual Meeting of Shareholders).*       10h.   Amendment to the Company’s 1998 Long Term Incentive Plan adopted by the           Board of Directors on February 14, 2002.* (Filed as Exhibit 10h to the report on           Form 10K. Filed on March 27, 2003)       10i.   Amendment to the Company’s 2000 Incentive Plan adopted by the Board of           Directors on February 14, 2002.* (Filed as Exhibit 10i to the report on Form           10K. Filed on March 27, 2003).       10j.   Compensation and Indemnification Agreement, dated as of December 13, 2004,           between Ampal-American Israel Corporation and each of Mr. Yehuda Karni, Mr.           Eitan Haber and Mr. Menachem Morag. (Filed as Exhibit 10j to the report on Form           10K. Filed on March 15, 2005).       10k.   Stock Option Cancellation Agreement, dated as of November 30, 2004, between           Ampal-American Israel Corporation and Dafna Sharir. (Filed as Exhibit 10k to the           report on Form 10K. Filed on March 15, 2005).                                         10l.   Omnibus Agreement, dated as of December 1, 2005, between Merhav Ampal Energy                                         Limited and Merhav  (M.N.F.) Limited.     * Management contract, compensatory plan or arrangement.   77    Exhibit 11 – Statement re Computation of Earnings Per Share  Exhibit 12 – Statement re Computation of Ratios  Exhibit 21 – Subsidiaries of the Registrant  Exhibit 23 – Consents of Experts and Counsel:         23.1 Brightman Almagor & Co., Certified Public Accountants A member firm of Deloitte Touche Tohmatsu E-23.1        23.2 Kesselman & Kesselman CPAs (Isr) A member of PricewaterhouseCoopers International Limited E-23.2        23.3 Brightman Almagor & Co., Certified Public Accountants A member firm of Deloitte Touche Tohmatsu E-23.3        23.4 Kost Forer Gabbay & Kasierer Member of Ernst & Young Global E-23.4        23.5 Kesselman & Kesselman CPAs (Isr) A member of PricewaterhouseCoopers International Limited E-23.5        23.6 Fahn, Kanne & Co. Certified Public Accountants (Isr.) E-23.6        23.7 Kost Forer Gabbay & Kasierer Member practice of Ernst & Young Global E-23.7        23.8 Somekh Chaikin, Certified Public Accountants (Isr.) E-23.8        23.9 Somekh Chaikin, Certified Public Accountants (Israel) E-23.9       23.10 Somekh Chaikin, Certified Public Accountants (Israel) E-23.10       23.11 Kesselman & Kesselman CPAs (Isr) A member of PricewaterhouseCoopers International Limited E-23.11       23.12 Kesselman & Kesselman CPAs (Isr) A member of PricewaterhouseCoopers International Limited E-23.12       23.13 Kost Forer Gabbay & Kasierer Member practice of Ernst & Young Global E-23.13    78    Exhibit 31.1 – Certification of Jack Bigio pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  Exhibit 31.2 – Certification of Irit Eluz pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   Exhibit 32 – Certification of Jack Bigio and Irit Eluz pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   79     SIGNATURES           Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 29 th day of March, 2006.       AMPAL-AMERICAN ISRAEL CORPORATION BY: /S/ JACK BIGIO—————————————— Jack Bigio, Chief Executive Officer andPresident (Principal Executive Officer)             Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 24, 2004.     Signatures   Title   Date          /s/ YOSEF A. MAIMAN——————————————     Yosef A. Maiman Chairman of the Board of Directors  March 29, 2006        /s/ JACK BIGIO——————————————     Jack Bigio President & CEO - Director  March 29, 2006        /s/ LEO MALAMUD——————————————     Leo Malamud Director  March 29, 2006        /s/ DR. JOSEPH YERUSHALMI——————————————     Dr. Joseph Yerushalmi Director March 29, 2006        /s/ YEHUDA KARNI——————————————     Yehuda Karni Director March 29, 2006        /s/ EITAN HABER——————————————     Eitan Haber Director March 29, 2006        /s/ MENAHEM MORAG——————————————     Menahem Morag Director March 29, 2006        /s/ IRIT ELUZ——————————————     Irit Eluz CFO, Senior Vice President -   Finance  and Treasurer (Principal Financial Officer)  March 29, 2006        /s/ GIORA BAR - NIR——————————————     Giora Bar-Nir  VP Accounting &Controller  (Principal Accounting Officer)  March 29, 2006     80    Granite Hacarmel Investments Limited and  its Subsidiaries Financial Statements as at December 31, 2003    Granite Hacarmel Investments Limited and its Subsidiaries    Financial Statements – December 31,   2003         CONTENTS       Page                     Auditors’ report to the shareholders   3            Consolidated balance sheets  4 -5            Consolidated statements of income  6            Consolidated statements of changes   in shareholders’ equity  7            Consolidated statements of cash   flows  8 - 10            Notes to the financial statements  11 - 78            List of the main investee companies   -  79 - 80   -2-            Somekh Chaikin  REPORT OF  INDEPENDENT  PUBLIC ACCOUNTING FIRM  THE SHAREHOLDERS OF GRANITE HACARMEL INVESTMENTS LIMITED   We have audited the accompanying consolidated balance sheets of Granite Hacarmel Investments Limited and its subsidiaries (the Company) as of December 31, 2003 and 2002, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company’s Board of Directors and of its Management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statement of the following affiliates:       —  Nitzba Holdings 1995 Ltd. (“Nitzba”), a 10 percent owned investee company, in respect to which the Company’s investment was NIS 75,400 thousands as of December 31, 2003 and the Company’s equity in its losses was NIS 9,900 thousands for the year then ended. Those financial statements were prepared on the basis of generally accepted accounting principles in Israel (” Israeli GAAP”).          —  L.D.I. Leasing Dynamics International Ltd. (“LDI”), a 25 percent owned investee company, in respect to which the Company’s investment was NIS 9,200 thousands and NIS 9,900 thousands as of December 31, 2003 and 2002, respectively and the Company’s equity in its losses was NIS 700 thousand and 1,000 thousands for the years ended December 31 2003 and 2002, respectively. Those financial statements were prepared on the basis of Israeli GAAP.          —  Oganim Beyarok Ltd (“Oganim”)., a 50 percent owned investee company, in respect to which the Company’s excess of accumulated losses over the cost of investments was NIS 300 thousands and NIS 140 thousands as of December 31, 2003 and 2002, respectively and the Company’s equity in its losses was NIS 1,000 thousand and NIS 2,300 thousands for the years ended December 31, 2003 and 2002, respectively. Those financial statements were prepared on the basis of Israeli GAAP with reconciliation from Israeli GAAP to generally accepted accounting principles in the United States (” U.S. GAAP”).      The financial statements of the affiliates referred above were audited by other auditors whose reports thereon were furnished to us, and our opinion, insofar as it relates to the amounts included for Nitzba and LDI, before conversion to U.S. GAAP and to Oganim for both Israeli GAAP and conversion to U.S GAAP, is based solely on the said reports of the other auditors.         We conducted our audits in accordance with generally accepted auditing standards, including standards prescribed by the Auditors Regulation (Manner of Auditor’s Performance) 1973 and in accordance with generally accepted auditing standards as established by the Auditing Standards Board (United States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.    We believe that our audits (which include procedures relating to the adjustments to convert information with respect to Nitzba and LDI as reported under Israeli GAAP to amounts reported under generally accepted accounting principles in the United States) provide a reasonable basis for our opinion.   In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years, in the three-year period ended December 31, 2003 in conformity with accounting principles generally accepted in Israel.   Accounting principles generally accepted in Israel vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature of such differences is presented in Note 32 to the consolidated financial statements.   As explained in Note 2, the above mentioned consolidated financial statements are stated in values adjusted for the changes in the general purchasing power of the Israeli currency, in accordance with opinions of the Institute of Certified Public Accountants in Israel.   As discussed in Note 28.B.2 to the financial statements there are few claims against consolidated companies which the court has been asked to recognize as class actions and other claims against consolidated companies claiming that their agreements with their customers are restrictive trade arrangements.   Somekh Chaikin Certified Public Accountants (Israel)   Haifa Israel, March 25, 2004   -3-   Granite Hacarmel Investments Limited and its Subsidiaries    Consolidated balance sheets as at   December 31          Adjusted to NIS of December 2003                       2003     2002                                          Note     NIS thousands     NIS thousands                                                                             Current assets                                                                                       Cash and cash equivalents        5           7,479           33,249  *       Marketable securities                    2,927           17,265          Trade receivables        6           965,614           1,017,645  *       Other receivables        6           71,737           125,388  *       Receivables for work in progress        6           14,443           17,068          Inventories        7           195,842           213,579          Affiliated company designated for sale        8           12,516           -                                                                           1,270,558           1,424,194                                                                                                  Non-current inventories        7           110,981           117,786                                                                                                  Investments, loans and long-term   receivables                                                                                       Affiliated companies and other investments        8           130,504           160,413  *       Long-term loans and receivables        9           129,837           130,123  *                                                                        260,341           290,536                                                                                                  Fixed assets, net        10           1,186,561           1,220,507                                                                                                  Other assets        11           209,049           149,577  *                                                                                                                                                                3,037,490           3,202,600                                                     * Reclassified           The notes to the financial statements are an integral part thereof. -4-    Granite Hacarmel Investments Limited and its Subsidiaries    Consolidated balance sheets as at   December 31         Adjusted to NIS of December 2003                      2003     2002                                          Note     NIS thousands     NIS thousands                                                                          Current liabilities                                                                                       Credit from banks and others        12           1,322,402           1,125,784          Trade payables        13           189,090           185,852  *       Other payables        14           195,788           180,035                                                                           1,707,280           1,491,671                                                                                                  Long-term liabilities                                                                                       Long-term loans        15           720,083           923,945  *       Customers’ deposits        16           58,102           61,050          Liabilities for severance pay, net        17           22,835           28,861          Deferred taxes        26           68,585           63,620                                                                           869,605           1,077,476                                                                                                  Minority interests                    8,133           7,774                                                                                                  Collateral, commitments and   contingent liabilities        28                                                                              Shareholders’ equity        19           452,472           625,679                                                                                                                                                                                                               3,037,490           3,202,600                                                      * Reclassified                                          Prof. I. Borovich – Chairman of the Board          _____________________    A. Sagis – President and Chief Executive Officer            ___________________________    J. Frohlich – Executive Vice President and Chief Financial Officer             __________________________ Date of approval of statements:  March 25, 2004 The notes to the financial statements are an integral part thereof. -5-    Granite Hacarmel Investments Limited and its Subsidiaries    Consolidated statements   of income for the year ended December 31         Adjusted to NIS of December 2003                      2003     2002     2001                                                Note     NIS thousands                                                                          Sales                    4,263,369        4,274,194        4,030,096       Less: Government imposts                    1,376,296        1,380,089        1,338,992                                                                                                     Net sales        20           2,887,073        2,894,105        2,691,104       Cost of sales        21           2,127,117        2,134,658        2,047,482                                                      Gross profit                    759,956        759,447        643,622                                                                                                     Selling and marketing expenses        22           500,843        480,784        400,227       General and administrative expenses        23           154,012        109,968  *     90,056  *                                                                        654,855        590,752        490,283                                                                                                     Income from operations                    105,101        168,695        153,339                                                                                                     Financing expenses, net        24           (130,505  )     (85,137  )     (75,622  )    Other (expenses) income, net        25           (62,167  )     (23,830  )     9,825                                                                           (192,672  )     (108,967  )     (65,797  )                                                                                                  (Loss)    Income before taxes on income                    (87,571  )     59,728        87,542       Taxes on income        26           9,628        (28,109  )*     (36,270  )*                                                                                                  (Loss) Income after taxes on income                    (77,943  )     31,619        51,272       Company’s share in results of affiliated        companies, net                    (17,189  )     (5,184  )     5       Minority interest in the results of         subsidiaries                    (914  )     (2,268  )     (1,761  )                                                   Net (loss) income for the year                    (96,046  )     24,167        49,516                                                                                                     Net (loss)earnings    per NIS 1 par value of        ordinary shares (in NIS):        19                                     Primary and diluted (loss) income                    (0.7  )     0.17        0.36                                                                                                     Number of shares of NIS 1 par value each    used in the calculation (in thousands)                    137,770        138,381        138,720                                                                                                     * Reclassified                                             The notes to the financial statements are an integral part thereof. -6-    Granite Hacarmel Investments Limited and its Subsidiaries    Consolidated statements of changes   in shareholders’ equity         Adjusted to NIS of December 2003             Share    capital     Premium    on shares     Less   Company   shares held   by a   subsidiary     Dividend    declared    subsequent    to  balance    sheet date     Retained    earnings     Total                                                         NIS   thousands                     Balance as at January 1, 2001        269,295        274,365        (3,603  )     -        143,001        683,058                                                                     Changes in 2001:                                                                                                                           Net income for the year        -        -        -        -        49,516        49,516       Dividend paid                 -        -        -        (124,944  )     (124,944  )    Acquisition of Company’s shares         by a subsidiary        -        -        (280  )     -        -        (280  )                                                                  Balance as at December 31, 2001        269,295        274,365        (3,883  )     -        67,573        607,350                                                                     Changes in 2002:                                                                                                                           Net income for the year        -        -        -        -        24,167        24,167       Dividend declared        -        -        -        77,009  *     (77,009  )*     -       Acquisition of Company’s shares         by a subsidiary        -        -        (5,838  )     -        -        (5,838  )                                                                  Balance as at December 31, 2002        269,295        274,365        (9,721  )     77,009        14,731        625,679                                                                     Changes in 2003:                                                                                                                           Net loss for the year        -        -        -        -        (96,046  )     (96,046  )    Dividend paid        -        -        -        (77,161  )     -        (77,161  )    Erosion of dividend paid        -        -        -        152        (152  )     -                                                                     Balance as at December 31, 2003        269,295        274,365        (9,721  )     -        (81,467  )     452,472                                                                    *Reclassified The notes to the financial statements are an integral part thereof. -7-    Granite Hacarmel Investments Limited and its Subsidiaries    Consolidated statements of cash   flows for the year ended December 31         Adjusted to NIS of December 2003             2003     2002     2001                                       NIS Thousands                                                                                           Cash flows from operating   activities                                  Net (loss) income        (96,046  )     24,167        49,516       Reconciliations required to present cash flows       from operating activities (A)        232,622        118,362        123,350                                          Net cash provided by operating activities        136,576        142,529        172,866                                          Cash flows from investing   activities                                  Acquisition of fixed assets        (102,357  )     (112,890  )     (99,600  )    Proceeds from the sale of fixed assets        12,274        12,750        4,745       Proceeds from the sale of investments in       companies presented by equity method        -        20        -       Investments in long-term loans        (17,195  )     (53,267  )*     (9,760  )    Collection of long-term loans        73,460        29,574        22,196       Investments in other assets and deferred expenses        (51,123  )     (33,365  )     (36,990  )    Acquisition of affiliated companies’ shares        (646  )     (1,617  )*     (10,999  )    Sale of marketable securities, net        19,436        2,594        914       Investments in companies carried at cost        (77  )     (72  )     -       Acquisition of subsidiary’s shares        -        (17,423  )     (71,548  )    Investment in capital note of affiliated company        -        (6,114  )     -       Acquisition of initially consolidated companies(B)        138        (2,434  )     (426,726  )    Proceeds from the sale a previously consolidated       company (C)        -        (5,480  )     (5  )                                        Net cash used in investing activities        (66,090  )     (187,724  )     (627,773  )                                       Cash flows from financing   activities                                  Dividend paid        (77,161  )     -        (124,944  )    Dividend to minority shareholders in subsidiaries        (555  )     (893  )     (1,613  )    Short-term credit from banks and others, net        107,946        (221,810  )     61,973       Receipt of long-term loans        10,492        371,277        548,974       Repayment of long-term loans        (137,298  )     (85,629  )     (3,054  )    Deposits received from customers        2,170        1,452        2,518       Deposits refunded to customers        (1,850  )     (873  )     (1,027  )    Repayment of debentures        -        (14,249  )     (14,672  )    Acquisition of Company’s shares by subsidiary        -        (5,838  )     (280  )    Proceeds from the issuance (redemption)  of          capital note        -        (615  )     652                                          Net cash (provided by) used for  financing activities        (96,256  )     42,822        468,527                                          (Decrease) increase in cash and cash equivalents        (25,770  )     (2,373  )     13,620       Cash and cash equivalents at beginning of year        33,249        35,622        22,002                                          Cash and cash equivalents at end of year        7,479        33,249  *     35,622                                                   * Reclassified           The notes to the financial statements are an integral part thereof. -8-    Granite Hacarmel Investments Limited and its Subsidiaries    Consolidated statements of cash   flows for the year ended December 31         Adjusted to NIS of December 2003                2003     2002     2001                                             NIS Thousands                        (A)  Reconciliations required to present   cash flows from    operating activities                                     Income and expenses not requiring   cash flows                                     Depreciation and amortization, net        128,820        118,773        100,803          Deferred taxes, net        (31,396  )     (10,987  )*     9,108  *       (Decrease) increase in liabilities for severance   pay, net        (7,478  )     (8,527  )     14,151          Minority interest in income of subsidiaries        914        2,268        1,761          Group’s    share in undistributed losses of affiliated    companies, net        17,492        6,597        2,129          Capital (gains) losses        (1,408  )     9,404        427          Erosion of long-term loans, debentures and capital    notes issued        5,044        (8,983  )     1,987          Erosion of loans granted        (267  )     (5,346  )     (3,624  )       (Increase) decrease in value of marketable   securities, net        (5,098  )     8,143        (8,068  )       Erosion and write-off of customers deposits        (3,268  )     (3,835  )     821          Decrease in value of investments in affiliated   company    and other companies, net        3,347        20,014        5,850          Decrease in value of fixed assets        35,480        -        -          Gain from decrease in percent ownership in an   affiliated    company        -        (629  )     -          Loss (profit) from the sale of  investments in subsidiary        -        21        (151  )       Changes in assets and liabilities:                                     Decrease (increase) in trade receivables, notes and    long-term checks for collection and receivables for    work in progress        26,199        (74,520  )*     112,904  *       Decrease (increase) in other receivables        17,912        (23,462  )     (36,909  )       Decrease (increase) in inventories and non-current    inventories        24,542        68,343        (2,839  )       Increase (decrease) in trade payables        939        20,530  *     (46,823  )*       Increase (decrease) in other payables        20,848        558        (28,177  )                                                      232,622        118,362        123,350                                             (B)  Acquisition of initially   consolidated companies                                     Working capital (excluding cash and cash   equivalents)        19,216        (3,363  )     (141,246  )       Fixed assets        (17,431  )     (1,384  )     (404,436  )       Long-term liabilities, net        -        15        62,943          Investment in affiliated company        (1,647  )     2,812        -          Goodwill created at the time of acquisition        -        (514  )     (881  )       Minority rights on the date of the acquisition        -        -        56,894                                                         138        (2,434  )     (426,726  )                                          (C)  Proceeds from the sale of   investment in a previously    consolidated company                                     Working capital (excluding cash and cash   equivalents)        -        (7,314  )     (1,373  )       Fixed and other assets        -        2,526        431          Long-term (liabilities) receivables, net        -        (343  )     117          Goodwill        -        -        267          Minority rights on date of sale        -        (328  )     402          Capital (loss) gain from sale of investment in   subsidiary        -        (21  )     151                                                Proceeds from sale of subsidiary        -        (5,480  )     (5  )                                             * Reclassified                                                The notes to the financial statements are an integral part thereof. -9-    Granite Hacarmel Investments Limited and its Subsidiaries    Consolidated statements of cash   flows for the year ended December 31         Adjusted to NIS of December 2003   (D)     Non-cash items:          2003     2002     2001                                       NIS Thousands                                                        Conversion of trade receivables to long-term loans        13,294        16,823        2,725                                                                             Acquisition of fixed assets against suppliers credit        2,247        356        1,318                                                                             Acquisition of other assets on credit        -        3,775        9,049                                                                             Minority interest in dividend declared by subsidiary        -        65        364                                         The notes to the financial statements are an integral part thereof. -10-        Granite Hacarmel Investments   Limited and its Subsidiaries         Notes to the Financial Statements   as at December 31, 2003            Note 1 -  General            A.  Granite Hacarmel Investments Ltd. (hereinafter: “the   Company”) (Public Company 520037177) and its subsidiaries are engaged mainly   in the following branches:               1.  Purchasing locally and importing fuel products and   liquefied petroleum gas (lpg), their marketing and distribution, among public   filling stations and to others.                  2.  The production and marketing of paints, coatings,   chemicals and other related products.                  3.  Engineering planning, construction and operation of   plants and systems for water enhancement and desalination.                  4.  Investment in real estate for rent.                  5.  Participation in oil and gas exploration.               B.  In these financial statements -               1.  Subsidiaries   –Companies, including  partnerships,   whose statements are directly or indirectly consolidated with those of the   Company.                  2.  Proportionally consolidated   subsidiaries – Companies, including partnerships or joint   ventures, whose statements are directly or indirectly partially consolidated   with those of the Company                  3.  Affiliated companies – Companies,   including partnerships, excluding subsidiaries and/or proportionally   consolidated subsidiaries, where the Company’s investment in them is   included, directly or indirectly in its financial statements by the equity   method.                  4.  Investee companies   – Subsidiaries or proportionally consolidated subsidiaries or affiliated   companies.                  5.  Group – The   Company and its investee companies.                  6.  Related Parties –   Within the meaning of Pronouncement 29 of the Institute of Certified Public   Accountants in Israel.                  7.  Interested Parties  - Within the meaning of sub-paragraph 1 of   the definition of  “Interested party”   in the Corporation as per paragraph 1 of the Securities Law.                  8.  Controlling Parties   – Within the meaning of the Securities Regulations (Presentation of   Transactions between a Corporation and Controlling Party in its Financial   Statements) – 1996.                  9.  Index – The   consumer price index as published by the Central Bureau of Statistics.     -11-        Granite Hacarmel Investments   Limited and its Subsidiaries          Notes to the Financial Statements   as at December 31, 2003             Note 2 -  Reporting   rules and accounting principles       A.  Principles   of adjustment and consolidation of financial statements               1.  Financial   statements in adjusted values                     a.  The Company and the   companies in the Group prepare their financial statements on the basis of the   historical cost convention adjusted for changes in the general purchasing   power of the shekel                        b.  The adjusted values of the   non-monetary assets do not necessarily    represent the value of those assets in the market or to the business,   but only their cost adjusted for changes in the purchasing power of the   shekel.                        c.  The term “cost” in these   financial statements means adjusted cost unless stated otherwise.                        d.  All the comparative data   for previous periods (including the amounts of monetary items) are presented   after being adjusted to the index of the end of the current reporting period.                     2.  Balance Sheet                     a.  Non-monetary items have   been adjusted for changes in the consumer price index since their acquisition   or creation until the balance sheet month.             The items treated as   non-monetary items are mainly fixed assets and accumulated depreciation   thereon, investments carried at cost, inventories which are not inventories   of fuel (see Note 2(c).(2), other assets and amortization thereon, share   capital and capital reserves.                        b.  The balance sheet value of   the investments in investee companies was determined on the basis of the   adjusted statements of those companies.                        c.  Deferred taxes, net, are   calculated on the basis of the adjusted data                         d.  Monetary items are   presented in the adjusted balance sheet at their nominal value.   -12-        Granite Hacarmel Investments   Limited and its Subsidiaries          Notes to the Financial Statements   as at December 31, 2003             Note 2 -  Reporting   rules and accounting principles (contd.)       A.  Principles   of adjustment and consolidation of financial statements (contd.)               3.  Statement of income              Items of the profit and loss have been adjusted to   changes  in the consumer price index   as follows:                        a.  Amounts relating to non-monetary items in the   balance sheet (such as depreciation and amortization, changes in inventories,   prepaid expenses and deferred income, etc) or to provisions included in the   balance sheet (such as severance and vacation pay) have been adjusted on the   basis of the specific indices in accordance with the adjustment of the corresponding   balance sheet item.                        b.  Other elements of the statement of income (such as   sales, purchases and other current costs) excluding the financing item, net,   have been adjusted on the basis of the indices for the months of the relevant   transactions.                        c.  The financing item expresses financing income and   expenses in real terms, the erosion of monetary items during the year,   profits and losses from realizing and revaluing marketable securities, and   profits and losses from derivative financial instruments.                        d.  The share in the results of operations of   unconsolidated investee companies  and   the minority interest in the results of the operations of subsidiaries, were   determined on the basis of the adjusted statements of the investee companies.                        e.  Current taxes are comprised of payments on account   during the year, plus amounts payable as of the balance sheet date (or less   amounts claimed as a refund as of the balance sheet date). The payments on   account have been adjusted on the basis of the index at the time of each   payment, while the amounts to be paid (or claimed as a refund) are included   without adjustment.  Therefore,   current taxes also include an expense resulting from the erosion in the value   of the advances on account of the tax from the date of payment to the balance   sheet date.             Deferred taxes – See Note 2.I. below.                     4.  Statement of changes in   shareholders’ equity                     A dividend declared and actually paid during the   year of account has been adjusted on the basis of the index at the time of   actual payment. A dividend which was declared/proposed during the year of   account and not yet paid as of the balance sheet date has been included   without adjustment.   -13-        Granite Hacarmel Investments   Limited and its Subsidiaries          Notes to the Financial Statements   as at December 31, 2003             Note 2 -  Reporting   rules and accounting principles (contd.)       A.  Principles   of adjustment and consolidation of financial statements(contd.)               5.  Consolidation of financial   statements                     a.  The Company’s consolidated financial statements   include the statements of the  Company   and those of companies under its control. The list of the main companies   whose statements are included in the consolidated statements and the   ownership share and control therein, appear in an appendix to the financial   statements.             Regarding companies initially consolidated,  as well as companies consolidated in the   past and not included in the consolidation in the year of account – see Note   3.                        b.  Significant intercompany balances and transactions   among consolidated companies and profits from sales between the companies   which have not yet been realized outside the Group have been cancelled.                        c.  The Company’s shares which were acquired by a subsidiary   are presented using the “treasury stock method”.                        d.  1.  The excess cost of the Company’s investments in   subsidiaries – not related to specific assets and identified liabilities   (“goodwill”) is included in “other assets” and depreciated by the straight   line method over a period of 10 years.    The excess value of assets purchased over and above the cost of the   investments in the investee companies – is first deducted from intangible   assets.  The excess negative cost   remaining after apportioning it to intangible assets was deducted from   non-monetary assets proportionally to the fair value of these assets   according to the Company’s share.  The   balance was set-off from the “Other assets” and amortized by the straight   line method over a period of 10 years.                              2.  Excess cost related to assets and liabilities is   recorded in the relevant items in the balance sheet.                     B.  Investments in Companies               1.  Investments in investee companies                     a.  Investments in investee companies are presented by   the equity method less a provision for a decline in the value when required   (see also Note 2(q)).             The investee companies including investments in a   number of investee companies which are inactive and/or insignificant and   which as a result were not consolidated and are presented at cost which does   not exceed their fair value.   -14-        Granite Hacarmel Investments   Limited and its Subsidiaries          Notes to the Financial Statements   as at December 31, 2003             Note 2 -  Reporting   rules and accounting principles (contd.)       B.  Investments in Companies  (contd.)                  1.  Investments in investee companies   (contd.)                           The Company periodically reviews its investments to   determine whether any of them have suffered a decline in value which is other   than temporary.  This review is made   when there are indications, including such factors as a decline in share   prices on the stock exchange, ongoing losses in investee companies, the   business sector in which it operates, the value of goodwill included in the   investment and other factors which indicate that the value of such   investments may have been adversely affected.              The writedown of    such investments to their adjusted values which, according to the   Company’s management, is based on a review of the relevant factors, their   importance, and their not being of a temporary nature, is reflected in the   statement of income in Other expenses.                            b.  Amortization of goodwill  - See also Note 2(a)(5) above.                        c.  The Company’s investments in capital notes of investee   companies are presented in the Company’s financial statements in accordance   with the Securities Regulations (Presentation of Transactions between a   Corporation and a Controlling Shareholder therein in the Financial   Statements) – 1996.                        d.  A list of the main investee companies is   included  in an appendix to the   financial statements.                  2.  Investments in other companies          Investments in other companies are included at cost   unless there was  a decline in their   value which is not of a temporary nature (See also Note 2(b)(1)(a) above).            C.  Valuation of Inventories               1.  Fuel inventories          The main part of the fuel inventories consists of   Security inventories.          The Security inventories are held in separate sealed   containers and presented as Non-current inventories. The security inventories   are stated at cost according to the exchange rate of  the dollar (the current rate) or the   exchange rate  determined by the Fuel   Authority if it is lower than the current rate. Regardless, the recovery of   the value of the inventories is guaranteed by the State by determining its   recovery value based on the exchange rate at the time of the sale.                      The commercial inventories are presented at the   lower of cost or market.  Cost is   determined by the  “first in – first   out” method.   -15-        Granite Hacarmel Investments   Limited and its Subsidiaries          Notes to the Financial Statements   as at December 31, 2003             Note 2 -  Reporting   rules and accounting principles (contd.)       C.  Valuation of Inventories (contd.)               2.  Other inventories          a.  Inventories of luboils, spare parts and others are   presented at the lower of cost or market.    Cost is determined by the moving average method.                        b.  Inventories of paints are presented at the lower of   cost or market. Costs are determined mainly as follows:             Raw and packaging materials -  by the moving average method.             Finished goods - by a standard price based on   calculated  production costs which   include raw materials, packaging materials, salaries and related expenses and   other expenses.             Work in progress – on the basis of the raw materials   plus calculated production costs.             Purchased goods – by the moving average method.                  D.  Fixed assets       Fixed assets are presented at cost less accumulated   depreciation (cost – plus excess costs relating to specific assets).   Improvements and refinements are charged to the cost of the assets while   maintenance expenses and repairs are charged as incurred to the statement of   income. Depreciation is calculated by the straight line method at annual   rates based on their estimated useful lives.    Capitalization of credit costs – see Note 2(n) below.               Annual rates of depreciation are:                %                           Buildings (including temporary buildings     and buildings for leasing)        2-10             Machinery and equipment        5-33   (mainly 10-15)       Vehicles        15-20             Computers        20-33             Office furniture and equipment        6-20             Leasehold improvements        over the period of lease which does not exceed the   economic life of the asset                       Excess costs relating to specific assets are   depreciated according to the estimated balance of the period of use of the   assets to which they relate.       Amortization of leasehold rights are over the period   of the lease.       Depreciation of buildings on leased land is over the   period of the lease.   -16-        Granite Hacarmel Investments   Limited and its Subsidiaries         Notes to the Financial Statements   as at December 31, 2003            Note 2 -  Reporting   rules and accounting principles (contd.)       E.  Other assets               Other assets are presented at cost and amortized at   annual rates from the start of their utilization as follows:       Deferred rental – over the period of the lease at   equal annual rates.       Goodwill – see Note 2(a)(5).       Distribution rights – over 20 years or according to   the period of the agreement.       Delivery    rights – over 10 years or according to the period of agreement.       Others– over the period of the expected benefit.            F.  Foreign currency and linkage               Assets (excluding securities) and liabilities in   foreign currency or linked to it, are included at rates of exchange in effect   on the balance sheet date.       Assets (excluding securities) and liabilities linked   to the consumer price index are included according to the linkage terms   applying to each balance.               Data on the consumer price index and rates of   exchange:                Dec. 31,   2003     Dec. 31,   2002     Dec. 31,   2001     %   change   2003     %   change   2002     %   change   2001                                                                                                                          Consumer price index-                                                                  In points        112.95        115.12        108.1        (1.9  )     6.5        1.4                                                                           Representative rate of    exchange of the US    dollar        4.379        4.737        4.416        (7.6  )     7.3        9.3          G.   Marketable securities                Marketable securities held as short term investments   are presented on the basis of their    realizable value on the stock exchange as of the balance sheet date.        Marketable securities which are permanent   investments are presented at cost less a provision for a decline in their   value which is other than a temporary nature (see also Note 2(b)(2) above).       Changes in the value of securities are fully   reflected in the statement of income.            H.  Provision for doubtful debts               The financial statements include a provision for   doubtful debts which adequately reflect, according to management’s   evaluation, the loss inherent in debts whose collection is in doubt.  The provision for doubtful debts includes   specific provisions. Management, in determining the adequacy of provisions,   considered, inter alia, information available regarding the financial   condition of customers, the extent of their operations and an evaluation of   the collateral received from them.   -17-        Granite Hacarmel Investments   Limited and its Subsidiaries          Notes to the Financial Statements   as at December 31, 2003             Note 2 -   Reporting   rules and accounting principles (contd.)        I.   Deferred taxes                The companies in the Group apportion taxes as a   result of temporary differences. Temporary differences are differences   between the value for tax purposes of assets and liabilities and their book   value.  The said apportionment is made   on account of differences relating to assets whose usage or expense are   recognized for tax purposes.        The balance of deferred taxes (asset or liability)   is calculated by the liability method at tax rates which are expected to be   in effect when the deferred taxes will be utilized, using tax rates and tax   laws which were legislated or whose legislation was completed as of the   balance sheet date.       The main factors in respect of which deferred taxes   have not been calculated are:       1.  Amounts of adjustment for the changes in the   purchasing power of the shekel relating mainly to buildings and private   vehicles according to rules set forth by the Institute of Certified Public   Accountants in Israel.       2.  Investments in investee companies, as it is the   Company’s intention to hold these investments rather than sell them.       3.  Tax benefits receivable for timing differences where   the possibility of realizing the benefit is uncertain.                  J.  Recognition of revenues               1.  Sales of products – revenues from the sales of   products are recorded at the time of delivery to customers with the transfer   of the main risks and benefits related to the ownership of the product sold.                     2.  Rental income – rental income is recorded over the   period of the agreement proportionally to the relevant period.                     3.  Income from work in progress– in accordance with   Accounting Standard No. 4, income from work in progress is recorded using the   percentage of completion method.          The periodic reporting of income and costs deriving   from building projects encompasses the full turnover, including those for   which at the time of the report, it is not possible to estimate their   expected profit, but for which it is possible to determine the anticipated   repayment of the costs already incurred.    In such instances, the full amount of such costs incurred are posted   to the statements of income against revenues up to the amount of the said   cost (hereinafter: “Zero profit margin”).              In those cases where a loss is expected from a   project a full provision for the expected loss as of the project’s completion   is recorded.   -18-        Granite Hacarmel Investments   Limited and its Subsidiaries          Notes to the Financial Statements   as at December 31, 2003             Note 2 -  Reporting   rules and accounting principles (contd.)       K.  Provision for linkage differences   on customers’ deposits               Supergas, a subsidiary, is obligated by law to pay   customers who terminate their gas purchasing agreement  an amount equal to the latest approved   deposit authorized by the Ministry of Industry and Trade, plus linkage   differences from the date of the last approval until the actual payment date.   The liability, included on the basis of the present value is determined   according to the actual liability as mentioned above.  The provision for this liability is made   on a present value basis.            L.  Earnings per share               Earnings per share is calculated in accordance with   Pronouncement 55 of the Institute of Certified Public Accountants in Israel.       In calculating the primary   earnings per share, the convertible securities issued by the Company were   taken into account if there is a likelihood of their conversion or   realization in accordance with the tests set forth in the Pronouncement.       In calculating diluted   earnings per share, convertible securities issued by the Company and its   investee companies which were not included in calculating the primary   earnings per share were taken into account, provided that their conversion or   realization does not result in an increase in earnings per share   (anti-dilutive effect).             M.  Use of   estimates               In preparing the financial   statements in accordance with generally accepted accounting principles,   management applies estimates and evaluations which affect the reported   amounts of assets and liabilities, the disclosure regarding contingent assets   and liabilities and also the amounts of income and expenses recorded in the   reporting period.  Actual results may   differ from these estimates.            N.  Capitalization   of credit costs               The Company capitalizes   credit costs in accordance with Accounting Standard No. 3 which relates to   “capitalization of credit costs”.    According to this Standard, specific credit costs and non-specific   credit costs should be capitalized to eligible assets.  The credit costs which are non-specific   are capitalized to that investment or that part of it which was not financed   by specific credit, while applying a rate which is a weighted average of the   cost for those sources of financing whose costs were not capitalized on a   specific basis.   -19-        Granite Hacarmel Investments   Limited and its Subsidiaries          Notes to the Financial Statements   as at December 31, 2003             Note 2 -  Reporting   rules and accounting principles (contd.)       O.  Presentation   of transactions between the Company and a controlling party       Transactions between the   Company and a controlling party in the Company are presented according to the   Securities Regulations (Presentation of Transactions between a Company and a   Controlling Party in the Financial Statements) – 1996.            P.  Derivative   financial instruments               Forward currency   transactions – derivative financial instruments not for hedging purposes are   presented in the balance sheet at their fair value.  Changes in fair value are posted to the financing item in the   statement of income.  Results of   derivative financial instruments which are intended for hedging are posted to   the statement of income concurrently with posting the results of the hedged   item.            Q.  Decline   in value of assets               The Company adopted   Accounting Standard No. 15 – Decline in the Value of Assets (hereinafter:   “the Standard”).  The Standard sets   forth procedures which the Company must implement in order to ensure that the   assets in its consolidated balance sheet (to which the Standard applies),   will not be presented at an amount exceeding their recoverable value, which   is the higher of the net selling price and the usage value (the present value   of the expected cash flows expected to result from the use of an asset and   its realization).         The Standard applies to   all assets in the consolidated balance sheet excluding tax assets and   monetary assets (apart from monetary assets which are investments in investee   companies that are not subsidiaries).  In addition the Standard   stipulates the rules of presentation and disclosure regarding assets whose   value declined.  Where the value of an   asset in the consolidated balance sheet exceeds its recoverable amount,  the Company recognizes a loss from the   decline in the value in the amount of the difference between the book value   of the asset and its recoverable amount. The loss recognized will be   cancelled only if there are changes in the estimates used in determining the   recoverable amount of the asset from the last date in which the loss from the   decline in value was recognized.               In September 2003, the   Israeli Accounting Standards Board published Clarification No. 1 regarding   the accounting treatment for a decline in the value of an investment in an   investee company which is not a subsidiary (hereinafter: “the   Clarification”). The Clarification stipulates that during periods subsequent   to the period in which the provision for the decline in the value of an   investee company which is not a subsidiary was first recorded, the investment   in the investee company must be presented at the lower of the recoverable   amount and the amount of the investment using the equity method, where the   recoverable amount is calculated for every reporting period in which there   are indications that there is a change in the recoverable amount.   -20-        Granite Hacarmel Investments   Limited and its Subsidiaries          Notes to the Financial Statements   as at December 31, 2003             Note 2 -   Reporting   rules and accounting principles (contd.)        R.  Environmental costs               Current operating    and maintenance costs of facilities used  to prevent pollution of the environment and expected provisions   for costs relating to restoring the environment, resulting from current   operations or past operations, are charged to the statement of income. The   costs of establishing facilities to prevent environmental pollution, which   increase the life or efficiency of a facility or reduce or prevent   environmental pollution, are charged to the cost of the fixed assets and   depreciated according to the depreciation policy of the Company.            S.  Disclosure of the effects of new   accounting standards during the period prior to their implementation               a.  In October 2001, the Israel Accounting Standards   Board published the following two Standards:          (1)  Accounting Standard No. 12 regarding “The   discontinuance of adjustment of financial statements”.  According to this standard the adjustment   of financial statements for the effect of changes in the general purchasing   power of the Israeli currency will be discontinued as of January 1, 2003.             In December 2002 the Israeli Accounting Standards   Board published Accounting Standard No. 17 which stipulated that the   implementation of Accounting Standard No. 12 will be postponed to January 1,   2004.  Therefore, the adjustment of   financial statements will be discontinued as of January 1, 2004.               The Company will continue to prepare adjusted   statements according to Pronouncement 36 of the Institute of Certified Public Accountants   in Israel until December 31, 2003. The adjusted amounts included in   the financial statements as of December 31, 2003 will serve as a starting   point for nominal financial reporting beginning January 1, 2004.  Implementation of Accounting Standard No.   12 is liable to have significant effects on the business results reported by   the Company. The extent of the effects depends on the rates of inflation, the   composition of assets and the sources of the Company’s financing.                        (2)  Accounting Standard No. 13 regarding “The effects of   changes in the rates of exchange of foreign currency”.  The standard deals with the translation of   transactions in foreign currency and the translation of financial statements   of foreign operations for their inclusion in the reporting corporation’s   financial statements. The Standard replaces the provisions of clarifications   8  and 9 to Pronouncement 36 of the   Institute, which will be cancelled when Accounting Standard No. 12 described   above, goes into effect.  Management   estimates that the implementation of the Standard will not have a significant   effect on the Company’s financial condition and on the results of its   operations.   -21-       Granite Hacarmel Investments   Limited and its Subsidiaries           Notes to the Financial Statements   as at December 31, 2003         Note 2 -    Reporting rules and accounting principles (contd.)    T.   Disclosure of effects of new   accounting standards during the period prior to their implementation (contd.)                   3.   In March 2004, the Israel Accounting Standard Board   published Accounting Standard No. 20 which relates to the period of   amortizing goodwill (hereinafter: “the Standard”).  The Standard stipulates that goodwill will be amortized over   its expected useful life in a methodical manner.  The period of amortization should reflect the best estimate of   the period in which future economic benefits should result to the entity.  The period of amortization is not to   exceed 20 years from the date of its first recognition.          The Standard will apply to financial statements for   periods beginning on January 1, 2004 or thereafter.          The change in the period of amortization of goodwill   balances as of January 1, 2004 will be treated as a change in a prospective   estimate (“from here on”).  Balances   of goodwill as mentioned, will be amortized in a methodical manner over the   balance of the period remaining to complete the said amortization period.          In the Company’s management’s opinion implementation   of the new Standard will not have a significant effect on the Company’s   financial condition and on its results of operations.         Note 3 -     Consolidated financial statements              Initially   consolidated companies               During the current year   the financial statements of Kleeson Holdings (1999) Ltd. were consolidated   for the first time.               Following are amounts   included in the consolidated financial statements (prior to the increase in   the rate of holding the company was presented by the equity method).                Date ofacquisition ofcontrol     December   31, 2003and the period fromthe acquisition up tothe above date                                       NIS   thousands                           Balance   sheet                                       Cash   and cash equivalents        138           51                  Working   capital (excluding cash and        cash equivalents), net        (19,216  )        (19,467  )               Fixed   assets, after deducting accumulated           depreciation        17,431           17,492                  Investment   in affiliated company        (1,647  )        -                                                     Statement   of income                                       Expenses   and costs        -           (131  )      -22-        Granite Hacarmel Investments   Limited and its Subsidiaries          Notes to the Financial Statements   as at December 31, 2003            Note 4 -  Accounting   with the Fuel Authority and government control in the energy sector – Sonol       1.  Amounts due to or from the Fuel Authority, the   government agency responsible for supervision of the fuel market in Israel,   to the extent still provisional, are included in the accounts each year   according to estimates prepared by Sonol Israel Ltd.’s management   (hereinafter: “Sonol”), a subsidiary, based on past experience.  Differences arising as a result of changes   in the estimates are reflected in the results of the period of account in   which they are determined.            2.  All the costs and expenses related to  the holding of Security inventories, are   fully recoverable from the government. Costs of holding Commercial   inventories are on Sonol’s account with all the attendant risks.            3.  The sales prices of 95 and 96 octane gasoline at the   public filling stations are subject to government control.   Note 5 –   Cash and cash equivalents Consist of:          December   31                            2003      2002                                  NIS   thousands                      In local currency         5,637        7,916  *    In foreign currency**        1,842        25,333                                          7,479        33,249                                Cash equivalents – bank deposits, whose maturities at the time of the deposit, did not exceed 3 months. *   Reclassified ** Mainly in US dollars. -23-        Granite Hacarmel Investments   Limited and its Subsidiaries          Notes to the Financial Statements   as at December 31, 2003        Note 6 –   Trade and other receivables   Consist of:             December   31                                 2003     2002                                       NIS   thousands                        (1)  Trade   receivables:                                 Customers   – open accounts        714,253        761,964  *            Income   receivable        19,800        18,665  *            Checks   and notes receivable        204,622        158,715               Credit   card companies        100,115        109,894               Current   maturities of long-term loans granted        30,204        23,091               Less   provision for doubtful debts        (103,380  )     (54,684  )*                                             965,614        1,017,645                                    (2)  Other   receivables:                                 Fuel   Authority        4,212        4,861               Government   agencies        424        1,114               Income   receivable        963        881               Income   tax receivable        4,383        12,085               Employees        1,188        821               Prepaid   expenses        10,435        17,274  *            Deferred   taxes, net**        33,896        31,823  *            Current   maturities of long-term receivables        -        38,349               Others        16,236        18,180                                                71,737        125,388                                    (3)  Receivables   for work in progress:                                 Income   receivable        62,114        63,768               Less   receipts on account of work in progress        47,671        46,700                                                14,443        17,068                                    (4)  For credit risks see Note   28e.                                                         *   Reclassified                            ** See Note 26                        Note 7 –   Inventories    Consist of:             December 31                                  2003      2002                                        NIS   thousands                                                         Crude oil and raw   materials         48,184        42,021          Finished goods        234,055        268,593          Auxiliary materials        12,933        14,932          Goods in process        6,574        5,819          Inventory of work in   process, net (1)        5,077        -                                                306,823        331,365          Less non-current   inventories (2)        110,981        117,786                                                195,842        213,579                                                                                                 (1)  Inventory of work in   process        57,879        51,150             Less amount reflected in   the statement of income        52,802        51,150                                                5,077        -                                       (2)  See Note 2.c.1                        -24-        Granite Hacarmel Investments   Limited and its Subsidiaries          Notes to the Financial Statements   as at December 31, 2003        Note 8 –   Investee companies and other investments             December   31                                 2003     2002                                       NIS   thousands                           Affiliated   companies and others:                                                         Investments in affiliated   companies                                                         Balance of investments as   at December 31, 1991        12,575        12,575                                       Changes as of January 1,   1992:                            Cost of shares**        146,693        146,047  *       Share in accumulated net   losses        (47,814  )     (31,969  )*       Write-down of investment        (15,152  )     (17,071  )       Long-term loans to   affiliated companies (1)        11,261        12,392  *       Investment in capital   notes of affiliated company (2)        6,936        6,114          Classification to current   assets (3)        (12,516  )     -          Presented in reserve for   losses        1,530        145                                                103,513        128,233          Investment in shares on   the cost basis after write down to   recoverable value (4)        26,991        32,180                                                130,504        160,413                                                                    *   Reclassified                            ** Including goodwill not   yet fully amortized:                                                              Original   amount        16,281        16,281                                            Balance        10,150        11,962                                                                    Securities   listed for trading on the Tel Aviv Stock Exchange:                                                         Affiliated companies:                                                         Book value        75,437        83,396                                       Stock exchange value        28,381        19,796                                                                    Companies at cost:                                                         Book value        3,369        4,294                                       Stock exchange value        7,580        7,437                                       (1)   The loans are index linked   and bear interest at the rate of 0%-10% with no due date but not prior to   January 1, 2005.    (2)  Permanent capital notes   issued by a limited partnership are unlinked and non-interest bearing.    (3)  In January 2004, after   signing MOU at December 2003, a subsidiary sold all its holdings in an   affiliated company.    (4)  In 2003 a provision for a   decline in the value of the investments of NIS 5,266 thousand was   included.  See also Note 25.   -25-        Granite Hacarmel Investments   Limited and its Subsidiaries          Notes to the Financial Statements   as at December 31, 2003        Note 8 –   Investee companies and other investments (contd.)           Changes in investment in affiliated companies:             NIS   thousands                                            Balance as at January 1,   2003     128,233          Changes during the year:                Investment in shares     646          Investment in capital   notes     822          Repayment of loans, net     (1,131  )       Initial consolidation of   former affiliated company (See Note 3)     1,647          Share in losses, net     (17,189  )       Reclassification of   writedown of investment in affiliated company   to equity losses     1,919          Dividend during the year   of report     (303  )       Reclassification to   current assets     (12,516  )       Changes in reserve for the   losses     1,385                                            Balance as at December 31,   2003     103,513                       -26-        Granite Hacarmel Investments   Limited and its Subsidiaries          Notes to the Financial Statements   as at December 31, 2003        Note 9 –   Loans and long-term receivables    A.  In consolidated balance sheet   comprised as follows:             December   31             2003     2002                                 NIS   thousands                                                 Loans to customers (1)        141,910        148,775  *      Other loans        5,390        1,872  *                                       147,300        150,647            Less current maturities        30,204        23,091                                          117,096        127,556                                                             Other receivables (2)        -        38,349  *      Checks and notes for   collection        12,741        2,567  *      Less current maturities        -        (38,349  )                                       12,471        2,567                                          129,837        130,123                                                             Dates of repayment of   loans:                           Current maturities        30,204                  Second year        21,253                  Third year        18,967                  Fourth year        10,825                  Fifth year        9,068                  Sixth year and thereafter   or without due date        56,983                                                   147,300                                            *  Reclassified                            (1)   December 31, 2003 – less provision of NIS 1,624   thousand for the difference between the interest stated in the loan and   market interest on the date of granting the credit to the customer.    (2)  Balance of long-term receivables in the Company from   the sale of shares of an investee company.    According to the sales agreement, the balance of the debt that was   linked to the consumer price index, was paid on April 22, 2003.  The discount rate of the balance of the   debt in 2002 was 6%.   -27-        Granite Hacarmel Investments   Limited and its Subsidiaries          Notes to the Financial Statements   as at December 31, 2003        Note 9 –   Loans and long-term receivables (contd.)    B.  Breakdown   of loans according to size of borrowers’ balances :                 December   31, 2003                           Borrowers balances of   NIS thousands     Number of loans     Total loans   NIS thousands                                 Up to  1,000        125           18,896             From  1,000 – 10,000        43           101,372             Over 10,000        2           27,032                                                         170           147,300                                                   A large part of the loans are covered by rental   agreements and long-term supplier agreements in favor of companies in the   Group and the companies have the right to offset amounts payable.             C.  Linkage terms and interest rates on   the loans:             December   31,  2003                                             Unlinked     Linked to   the   index     Linked to   foreign currency                                             Interest rates:     0%     10-20%     0-4%     over    4-10%     0-3%     over    3-5%     Total                                                               NIS   thousands                     Loans to   customers     6,335     37     50,365     35,891     35,171     14,111     141,910       Others     -     -     159     5,231     -     -     5,390                                                               6,335     37     50,524     41,122     35,171     14,111     147,300                                                         Less current   maturities                                         30,204                                                                                                   117,096                                                            D.   Regarding credit risks see Note 28.e.    -28-        Granite Hacarmel Investments   Limited and its Subsidiaries          Notes to the Financial Statements   as at December 31, 2003         Note 10 –   Fixed assets    a.  Consist   of:                Land   and   buildings*     Machinery   and   equipment     Furniture,   equipment and   computers     Vehicles     Total                                                         NIS   thousands                           Cost                                        Balance at beginning   of year     1,234,537     1,384,850     166,216     78,720     2,864,323          Additions**     55,275     40,698     12,936     7,391     116,300          Disposals     (7,173  )  (3,121  )  (766  )  (9,047  )  (20,107  )                                                Balance at end of   year     1,282,639     1,422,427     178,386     77,064     2,960,516                                                   Accumulated   depreciation                                        Balance at beginning   of year     455,402     1,020,292     115,594     52,528     1,643,816          Depreciation   charged**     30,979     52,807     18,763     7,300     109,849          Depreciation on   disposals     (103  )  (2,422  )  (222  )  (6,631  )  (9,378  )                                                Balance at end of   year     486,278     1,070,677     134,135     53,197     1,744,287                                                   Provision for   decline in value                                        Losses from decline   in value, net     (29,752  )  (3,013  )  -     -     (32,765  )       Withdrawals for   assets sold     3,097     -     -     -     3,097                                                   Balance at end of   year     (26,655  )  (3,013  )  -     -     (29,668  )                                                Depreciated balance   as at Dec. 31, 2003     769,706     348,737     44,251     23,867     1,186,561                                                   Depreciated balance   as at Dec. 31, 2002     779,135     364,558     50,622     26,192     1,220,507                                                      *   Including   lesehold improvements    ** Including on behalf of an initially consolidated company (See Note 3).    -29-        Granite Hacarmel Investments   Limited and its Subsidiaries          Notes to the Financial Statements   as at December 31, 2003        Note 10 –   Fixed assets (contd.)_    b.  Land and buildings include buildings on land leased   by capital leasing at a cost of NIS 327,617 thousand for various original   periods of 49-98 years ending in the years 2004-2072.  Land and buildings costing NIS 282,624   thousand  have not yet been registered   in the name of the Company or in subsidiaries in the Land Registry   Office.  The main reason for the lack   of registration is that the land settlement and subdivision procedures have   not yet been completed.               Land and buildings include buildings on leased land   and leasehold improvements to rented property having a cost of NIS 20,359   thousand and a depreciated cost of NIS 10,365 thousand.  The terms of the leases were for original  periods of 4 to 25 years.            c.  Financing expenses of NIS 5,458 thousand for loans   and credit used to finance the construction of  fixed assets were charged to the cost of these assets.            d.  Regarding collaterals see Note 28.   Note 11 –   Other assets Consist of:          Depreciated   balance                           December   31                           2003     2002                                 NIS   thousands                        Other   assets                            Leasing and deferred rental        31,612        31,560  *       Goodwill in subsidiaries        15,035        17,360  *       Concessions for oil and gas exploration (1)        915        4,698          Delivery and filling station operation   rights        69,829        42,388  *       Distribution rights        19,431        21,374          Others (2)        21,015        14,841  *                                       157,837        132,221          Long-term deferred taxes (See Note   26)        51,212        17,356                                          209,049        149,577                                    (1)   See also Notes 25 and 31.a.    (2)  After writeoff in the amount of NIS 2,715 thousand            *  Reclassified   -30-        Granite Hacarmel Investments   Limited and its Subsidiaries          Notes to the Financial Statements   as at December 31, 2003        Note 12   -  Credits from banks and other credit provided Details of linkage and interest rates:          December   31, 2003     December   31,2002                           Interest rates     Unlinked   5.7%-9.4%     Linked to   the   index   4.6%-6.5%     Linked to   foreign currency   2.4%-4.2%     Total     Unlinked   6.3%-13.1%     Linked   to the index   4%-7.2%     Linked to   foreigncurrency   2.5%-3.1%     Total                                                                     NIS   thousands     NIS   thousands                           Overdrafts     1,345     -     -     1,345     12,936     -     -     12,936       Short-term loans     922,812     -     179,401     1,102,213     773,143     -     202,860     976,003       Current maturities of   long-term loans     22,752     194,314     744     217,810     -     134,851     856     135,707                                                               Total credit from banks     946,909     194,314     180,145     1,321,368     786,079     134,851     203,716     1,124,646       Credit from others     -     1,034     -     1,034     -     1,138     -     1,138                                                                     946,909     195,348     180,145     1,322,402     786,079     135,989     203,716     1,125,784                                                              -31-        Granite Hacarmel Investments   Limited and its Subsidiaries         Financial Statements – December 31,   2003        Note 13   –Trade payables The liabilities include NIS 2,932 thousand balances of related and interested parties (2002 – NIS 36,437 thousand). Linkage terms – See Note 18. Note 14 –   Other payables Consist of:          December   31             2003     2002                                 NIS   thousands                                                 Liabilities to employees   and other salary related liabilities        41,757        44,270         Institutions        72,390        70,374         Accrued expenses        44,860        34,346         Income tax payable        19,131        10,215         Deferred taxes        868        1,300         Reserve for losses of   affiliated companies        1,530        145         Others        15,252        19,385                                                                    195,788        180,035                                        Granite Hacarmel Investments   Limited and its Subsidiaries          Notes to the Financial Statements   as at December 31, 2003        Note 15 –   Long-term liabilities    a.  Long-term   loans   Consist of:                December   31             Rate of                   interest     2003     2002                                       %     NIS   thousands                                                                 Loans   from banks – index linked        4.6-6.5        702,826        828,219          Loans   from banks – unlinked        7.6        227,520        223,221          Customers   deposits – index linked        -        3,206        3,197          Customers   deposits – linked to foreign   currency        -        -        88          Loans   from banks – linked to foreign   currency        2.4        3,317        4,364          Loans   from others – index linked        4.5        809        352          Capital   notes – unlinked        -        215        211  *                                                         937,893        1,059,652          Less   current maturities                 217,810        135,707                                                            720,083        923,945                                                                             Maturity dates:                                                                                    December 31                                             2003     2002                                                   NIS thousands                                                                    First   year – current maturities                 217,810        135,707                                                                                Second   year                 241,437        216,667          Third   year                 88,697        240,179          Fourth   year                 55,851        87,494          Fifth   year                 60,601        54,186          Sixth   year and thereafter                 269,266        321,570          Without   due date                 4,231        3,849  *                                                         720,083        923,945                                                                                               937,893        1,059,652                                         Accrued interest is included in current liabilities in “other payables”. * Reclassified -33-             Granite   Hacarmel Investments Limited and its Subsidiaries         Notes to   the Financial Statements as at December 31, 2003        Note 15 –  Long-term liabilities (contd.)    b.  In order to obtain the long-term bank credit taken   by the Company and Sonol, the Company undertook the following covenants to   the main banks providing the credit:               1.  Total shareholders’ equity plus customers’ deposits   will not be less than NIS 450 million.    The amount is linked to the index of December 1998.                  2.  The ratio of shareholders’ equity  plus customers’ deposits divided by total   assets less Security inventories will not be less than 20%.  Subsequent to the balance sheet date it   was agreed with the banks to whom the covenants were issued that the ratio   will be 17% for a period until March 31, 2005.                  3.  Maintaining the ratio of total liabilities to the   banks and financial institutions (less liabilities for Security inventories)   to EBITDA (earnings before interest, taxes, depreciation and amortization)   that will not exceed 10 at any time.                  On the date of editing the financial statements the   Company has complied with the covenants. In addition the Company and certain   subsidiaries agreed not to create a specific collateral on its assets   (excluding a certain specific existing collateral, and excluding a collateral   to finance the acquisition and development of those assets).   Note 16 –  Customers’ deposits    a.   The deposits are   calculated on the basis of present value at an annual rate of interest of 4%.             b.  Customers’ deposits   include NIS 32,747 thousand (2002 – NIS 36,894 thousand) of linkage   differences accrued on these deposits.   Note 17 –  Liabilities for severance pay, net Consist of:          December   31                           2003     2002                                 NIS thousands                        Liabilities   for severance pay (a)        14,305        18,387          Less –   Funded amounts deposited**        5,012        5,671                                          9,293        12,716          Liabilities   for early pension (b)*        11,348        13,801          Reserve   for redemption of sick leave (c)        2,194        2,344                                          22,835        28,861                                    *   Does not include NIS 7,445 thousand (2002 - 8,897   thousand) the current portion of severance pay, net, included in other   payables.            **  The deposited funded amount can be withdrawn subject   to the provisions of the law.    Accumulated profits on these funded amounts are included in the   statement of income.   -34-             Granite   Hacarmel Investments Limited and its Subsidiaries         Notes to   the Financial Statements as at December 31, 2003        Note 17 –  Liabilities for severance pay, net (contd.)    (a)  The Company’s liabilities and those of its investee   companies for payments of pension and severance pay are fully covered by   provisions for severance pay, deposits in approved pension and severance pay   funds and managers’ insurance programs.    The deposits in the approved pension and severance pay funds and the   deposits in managers’ insurance programs are not included in the financial   statements as they are not controlled by the companies.            (b)  The liabilities for early pension are calculated at   the present value of future liabilities for employees who retire.       The liabilities are until such time when the   employee reaches the age of 65 (women up to the age of 60) and are calculated   at a fixed percentage of the maximum pension due to the employee from the   pension fund.  The discount rate used   in calculating the liability is based on the stock exchange discount rate for   annual interest charged on index linked amounts, in effect on the date of the   employees’ retirement from the Company.               Subsequent to the balance sheet date a law was   enacted in the Knesset, according to which retirement ages as of April 1,   2004 will be delayed gradually until the age of 67 for men and 62 for   women.  Against this the Minister of   Finance submitted a letter to the chairman of the Finance Committee of the   Knesset, according to which an annual fund for severance pay will be provided   for those harmed by the implementation of the law, including employers.  The Company’s management is examining all   the financial and legal aspects as a result of the implementation of the law,   and its effects on the Company’s liabilities.            (c)  According to labor agreements between investee   companies and their employees, an employee who retires, is entitled to   receive a partial redemption of the unused sick pay subject to a maximum   number of sick days.  The reserve was   prepared in part according to actuarial calculations and in part on the basis   of past experience based, inter alia, on a net discount  rate (after taking into account the rate   of real wage costs) of 3%.   -35-             Granite   Hacarmel Investments Limited and its Subsidiaries         Notes to   the Financial Statements as at December 31, 2003        Note 18 –  Linkage of monetary balances          December 31, 2003     December 31, 2002                                 Linked   to the   index     Linked   to   foreign   currency   **     Unlinked   ***     Linked   to the   index     Linked   to   foreign   currency   **     Unlinked   ***                                                         NIS thousands     NIS thousands                                                                                         Financial assets:                                                                                                                           Cash and cash equivalents        -        1,842        5,637        -        25,333        7,916  *    Customers and receivables   for        work in progress        20,249        45,281        914,527        13,649        61,068        959,996  *    Other receivables        778        954        25,674        39,170        1,678        35,443  *    Investments in loans and        capital notes        7,255        -        34        7,197        -        6,114       Long-term loans, net        67,472        41,343        21,022        71,352        50,581        8,190  *                                                                           95,754        89,420        966,894        131,368        138,660        1,017,659                                                                                                                                   Financial liabilities:                                                                                                                           Credit from banks and   others        (excluding    current        maturities)        1,034        179,401        924,157        1,138        202,860        786,079       Trade payables        2,343        56,100        130,647        -        76,734        109,118  *    Other payables        24,524        1,077        160,344        26,674        6,602        136,417       Long-term loans (including        current maturities)        706,841        3,317        227,735        831,768        4,452        223,432       Deposits from customers        58,102        -        -        61,050        -        -                                                                              792,844        239,895        1,442,883        920,630        290,648        1,255,046                                                                        *   Reclassified     **  Mainly US dollars    ***  Part of which bear   interest   Against the excess of liabilities linked to foreign currency totaling NIS 150,500 thousand (2002 – NIS 152,100 thousand) Sonol holds inventories of fuel totaling NIS 156,600 thousand (2002 – NIS 181,900 thousand), which are mainly Security inventories valued according to changes in the rate of exchange of the dollar as explained in Note 2.c.1.  -36-             Granite   Hacarmel Investments Limited and its Subsidiaries         Notes to   the Financial Statements as at December 31, 2003        Note 19 –  Share capital    a.  Nominal             Authorized     Issued and   paid up*                                 December   31,   2003     December   31,   2002     December   31,   2003     December   31,   2002                                             NIS   thousands     NIS   thousands                           225,000,000 ordinary   shares of   NIS 1 par value each        225,000        225,000        139,336        139,336                                                      *   139,335,657 ordinary   shares        As of December 31, 2003   and 2002 a subsidiary holds 1,565,540 ordinary shares of the Company.       All the shares are listed   for trading on the Tel Aviv Stock Exchange.       b.  (Loss)   Earnings per share            1.  Adjusted net (loss) income   used in calculating earnings per share is as follows:                For the year ended December 31                                 2003     2002     2001                                             NIS thousands                                                                 Net (loss) income per   statement   of income        (96,046  )     24,167        49,516                                                2.   The par value of the   shares used for calculating net income per NIS 1 par value of shares:                For the year ended December 31                                 2003     2002     2001                                             NIS thousands par value                                                                 Share capital in   calculating   primary earning per share        137,770        138,381        138,720                                            Note 20 –  Net sales             For the year ended December 31                                 2003     2002     2001                                             NIS thousands                                                                 Commercial operations        2,429,723        2,375,391        2,394,714          Manufacturing operations        439,654        503,281        285,984          Other operations        17,696        15,433        10,406                                                         2,887,073        2,894,105        2,691,104                                            -37-             Granite   Hacarmel Investments Limited and its Subsidiaries         Notes to   the Financial Statements as at December 31, 2003        Note 21 –  Cost of sales Consolidated:    a.  Consist of:                For the year ended December 31                                 2003     2002     2001                                             NIS thousands                                                                 Fuel products and other   materials used*        1,974,209        1,946,807        1,907,459                                                Wages and outsourcing        42,971        43,081        25,590                                                Manufacturing expenses        89,439        126,954        104,662                                                Depreciation and   amortization        20,498        17,816        9,771                                                                                      Total cost of sales        2,127,117        2,134,658        2,047,482                                                                                      Decrease (increase) in inventories        24,542        68,343        (2,839  )                                                *  Financing income   (expenses) deriving from the erosion of dollar linked credit used  as a source of financing for the   acquisition of inventories of fuel included in the Cost of sales (See also Note   2.c.1)            b.  Categories according to types of   income:                For the year ended December 31                                 2003     2002     2001                                             NIS thousands                                                                 Commercial operations        1,819,389        1,818,940        1,876,451                                                Manufacturing operations        298,606        308,187        166,502                                                Other operations        9,122        7,531        4,529                                                         2,127,117        2,134,658        2,047,482                                            -38-             Granite   Hacarmel Investments Limited and its Subsidiaries         Notes to   the Financial Statements as at December 31, 2003        Note 22 –  Selling and marketing expenses Consist of:             For the year ended December 31                                 2003     2002     2001                                             NIS thousands                                                                 Wages and salaries        162,731        151,696        125,534          Advertising        25,998        32,872        17,139          Depreciation and   amortization        85,294        81,082        78,246          Maintenance of buildings,   installations and        filling stations        31,728        28,545        28,322          Rent and municipal taxes        105,617        92,117        75,289          Transport and maintenance   of commercial        vehicles        55,528        52,920        47,220          Other expenses        33,947        41,552        28,477                                                         500,843        480,784        400,227                                            Note 23 –  General and administrative expenses           Consist of:             For the year ended December 31                                  2003      2002      2001                                              NIS thousands                                                                  Wages and salaries         56,790        57,538        45,326          Depreciation and   amortization        17,110        18,795        12,323          Consulting, legal and   auditing        12,736        12,431        9,260          Provision for doubtful/bad   debts        48,954        5,184  *     12,884  *       Other expenses        18,422        16,020        10,263                                                         154,012        109,968        90,056                                                * Reclassified                                 Note 24 –  Financing (expenses) income, net           (Expenses) income are derived from:          For the year ended December 31                            2003      2002      2001                                        NIS thousands                                Long-term liabilities         (58,480  )     (44,795  )     (33,758  )              Marketable securities, net        5,460        (8,143  )     (204  )              Other receivables and   payables        2,379        4,108        10,812                 Short-term loans received        (92,540  )     (11,380  )     (69,358  )              Convertible debentures   linked to the dollar        -        9        (1,823  )              (Loss) gain from forward   transactions        (1,308  )     972        644                 Others, including erosion   of other monetary               assets and liabilities, net        13,984        (25,908  )     18,065                                                   (130,505  )     (85,137  )     (75,622  )                                      -39-             Granite   Hacarmel Investments Limited and its Subsidiaries         Notes to   the Financial Statements as at December 31, 2003               Note 25 –  Other (expenses) income, net               Consist of:                For the year ended December 31                                 2003     2002     2001                                             NIS thousands                                                                 Provisions for a decline   in the value of   fixed and other assets (a)        (35,480  )     -        -          Amortization of assets and   concessions for   prospecting for oil and gas (b)        (12,924  )     (9,107  )     -          Write-off of investment in   affiliated   company and on the basis of costs, net        (5,266  )     (20,014  )     (5,850  )       Management fees        1,517        1,114        511          Leasing        673        1,102        1,228          Dividends and shares   received        145        469        12,647          (Loss) gain from realizing   investment in   investee companies        -        (21  )     151          Miscellaneous, net  (c)        (10,832  )     2,627        1,138                                                         (62,167  )     (23,830  )     9,825                                                   (a)  See also Note 2(q)       (b)  See also Note 31(a)       (c)  Including expenses and provisions for settling   claims and demands.   Note 26 –  Taxes on income    A.  The Company and most of its subsidiaries are   assessed under the Income Tax Law (Adjustments for Inflation) – 1985,   hereinafter the “Adjustments Law”, in effect from the 1985 tax year – which   introduced the measurement of results for tax purposes in real terms.  The various adjustments required by the   above law should result in taxation based on real income.  Nevertheless, the adjustment of nominal   income according to the tax Laws is not always identical to the inflationary   adjustment pursuant to the Pronouncements of the Institute of Certified   Public Accountants.  As a result,   differences arise between the adjusted income according to the financial   statements and the adjusted income for income tax purposes.               In the financial statements for 2003 the Company   implemented the law as written and took into account the negative rate of   change of the index in calculating the tax provision.   -40-             Granite   Hacarmel Investments Limited and its Subsidiaries         Notes to   the Financial Statements as at December 31, 2003        Note 26 –  Taxes on income (contd.)    B.  Amendments to the Income Tax   Ordinance and the Land Betterment Tax Law               1.     In March 2002 the Knesset passed Amendment No. 50 to   the Land Taxation Law (Land betterment, selling and purchasing) (hereinafter:   “the Amendment”) which came into effect on November 7, 2001 (hereinafter:   “the effective date”).          The Amendment stipulates, inter alia, that upon the   sale of a right in real estate or a transaction in a land association, the   Company will be liable for tax at a rate of 36% on the real betterment   created up to the effective date and 25% on the betterment created after the   effective date where the allocation is linear according to the ratio of the   periods.  In addition , the amendment   stipulates land betterment tax discounts on transactions carried out during   2002 and 2003 and an exemption from sales tax on land purchased after the   starting date.  Furthermore , the new   provisions were enacted for the purpose of calculating the tax from the sale   of shares in a land association and other provisions were added for the   purpose of facilitating certain transactions in real estate such as the   temporary provisions regarding replacements, sale of options, combination transactions,   vacating and building.               2.     On July 24, 2002 the Knesset passed the “Law for the   Amendment of the Income Tax Ordinance” (Amendment No. 132) – 2002 and in   December 2002 an amendment to the said Law was passed (hereinafter: “the Tax   Reform”) which became effective as of January 1, 2003.  Within the framework of the Tax Reform the   basis for taxation in Israel was changed, to a personal basis from a   territorial / geographic basis.  As of   January 1, 2003, an Israel resident will be subject to his tax on his total   global income.               3.     The main provisions of the tax reform likely to   affect Israeli resident companies are:                     a.  The source rules – source rules have been set forth   to determine the location where income is derived.                        b.  A controlled foreign corporation (CFC) - rules have   been issued according to which, in certain cases, Israeli shareholders will   be taxed on theoretical dividends for passive undistributed income from a   foreign resident company under their control          c.  The offsetting of losses from abroad – restrictions   have been issued regarding offsetting losses from abroad.   -41-             Granite   Hacarmel Investments Limited and its Subsidiaries         Notes to   the Financial Statements as at December 31, 2003        Note 26 –  Taxes on income (contd.)    B.  The amendments to the Income Tax   Ordinance and the Land Betterment Tax Law (contd.)                        d.  Tax credit – within this framework, special   provisions have been made to provide a credit to an Israeli company who paid   foreign tax on income from abroad and is subject to company tax.                        e.  Capital gains – The rate of tax on capital gains   from non-negotiable assets was reduced from 36% to 25% (linear according to   the ratio of periods), excluding capital gains on marketable securities in a   company as reflected in the Adjustments Law.                        f.  Regarding individuals and companies to which the   Adjustments Law does not apply,  tax   was imposed on capital gains and interest from securities traded on the stock   exchange in Israel and abroad at lower tax rates of 10%, 15% or 25% regarding   an individual and companies not subject to the Adjustments Law and whose   income is not considered to be business income.  In addition, the definition of foreign securities was changed   in such a way that a security issued by an Israeli company is not considered   to be a foreign security.                        g.  Cancellation of the“seven years”restriction   regarding the utilization of capital losses carried forward (applicable to   losses incurred in 1996 and thereafter).                        h.  Transfer prices – general provisions were issued   requiring reporting on international transactions between related parties   according to market conditions.  These   provisions will come into effect when regulations are issued (no regulations   have yet been issued).   -42-             Granite   Hacarmel Investments Limited and its Subsidiaries         Notes to   the Financial Statements as at December 31, 2003        Note 26 –  Taxes on income (contd.)    C.  Deferred taxes               For the following items:             Depreciable   fixed assets     Deductions   and losses   transferable   for tax   purposes     Liabilities   for   severance   pay, net     Other     Total                                                   NIS thousands                                                                          Balance as at January 1,   2002        (69,362  )     295        24,709        17,069  *     (27,289  )                                                         Changes   in 2002:                                                                                                         Current        (438  )     3,060        (7,322  )     15,687  *     10,987                                                            Addition for company   initially   consolidated        -        462        36        63        561                                                                                                                 Balance as at December 31,   2002        (69,800  )     3,817        17,423        32,819        (15,741  )                                                         Changes   in 2003:                                                                                                         Current        (1,013  )     17,092        (2,807  )     18,124        31,396                                                                                                                 Balance as at December 31,   2003        (70,813  )     20,909        14,616        50,943        15,655                                                           The deferred taxes are presented in the balance sheets as follows:          December   31                           2003     2002                                 NIS thousands                                               In current assets        33,896        31,823  *    In current liabilities        (868  )     (1,300  )    In other assets and   deferred expenses, net        51,212        17,356       In long-term liabilities        (68,585  )     (63,620  )                                       15,655        (15,741  )                             *   Reclassified -43-             Granite   Hacarmel Investments Limited and its Subsidiaries         Notes to   the Financial Statements as at December 31, 2003        Note 26 –  Taxes on income (contd.)    D.  The provision in the statement of   income consists of: – expense (income):                For the year ended December 31                                 2003     2002     2001                                             NIS thousands                                                                 Current taxes including   erosion of        advance tax payments        20,889        40,797        27,326          Deferred taxes, net        (31,396  )     (10,987  )*     9,108  *                                                                                   (10,507  )     29,810        36,434                                                Taxes on account of   previous years        879        (1,701  )     (164  )                                                                                   (9,628  )     28,109        36,270                                                                             E.   Final assessments                The Company, Sonol and Supergas received final   assessments through the 1999 tax year.    The assessments for these companies were completed in 2002 within the   framework of a compromise with the Tax Authorities.  The net effect, part of which results from timing differences,   was included in financial results for 2002.    Sprint Motors Ltd. received final tax assessments through 1998. All   other companies in the Group, have final tax assessments within the framework   of Section 145(a)(2) – Income Tax Ordinance (Statute of Limitations) through   years 1997 and 1998.             F.  Losses, deductions and additional   tax for the purpose of tax to be carried forward to future years.               Losses for tax purposes of the Company and its   subsidiaries to be carried forward to future years, as of the balance sheet   date reached an adjusted amount of NIS 99,000 thousand.               The balances of losses and deductions carried   forward to following years are index linked - in accordance with the   Adjustments Law mentioned in (a) above.   -44-             Granite   Hacarmel Investments Limited and its Subsidiaries         Notes to   the Financial Statements as at December 31, 2003        Note 26 –  Taxes on income (contd.)    G.  Reconciliation between the   theoretical tax on pre-tax adjusted income and the provision for tax included   in the statements                For the year ended December 31                                 2003     2002     2001                                             NIS thousands                                                                 Statutory tax rates        36  %     36  %     36  %                                                                                   Theoretical tax per   applicablet tax rates        (31,526  )     21,502  *     31,515  *                                             Differences in definition   of capital, assets        and expenses for tax purposes and others,        net (1)        21,108  (1)     8,096  *     4,856  *                                             Erosion of advance tax   payments        (89  )     212        63                                                Taxes on account of   previous years        879        (1,701  )     (164  )                                                      (9,628  )     28,109        36,270                                                   (1)  Including NIS 9,770   thousand for losses and deductions on which no deferred taxes were   apportioned                  * Reclassified   -45-             Granite   Hacarmel Investments Limited and its Subsidiaries         Notes to   the Financial Statements as at December 31, 2003        Note 27 –  Segment reporting Segment reporting by products and services: The accounting principles applied in the segment reporting are in accordance with those adopted for the purpose of preparing and presenting the Company’s consolidated financial statements.          For the   year ended December 31, 2003                           Fueland gas     Paint and   chemicals     Others     Consolidated                                             NIS thousands                                                                 Profit   and loss data:                                                                                       Income                                           Net external sales        2,400,768        380,310        105,995        2,887,073       Sales within segments        -        -        -        -                                                   Total sales        2,400,768        380,310        105,995        2,887,073                                                                                               Results                                                                                       Segment results        83,040        31,697        6,267        121,004       Unallocated expenses                                   (15,903  )                                                Income from operations                                   105,101       Financing expenses                                   (137,980  )    Financing income                                   7,475       Other expenses, net                                   (62,167  )    Taxes on income                                   9,628       Minority interest in   results of subsidiaries                                   (914  )    Share in results of   affiliated companies, net        (717  )              (16,472  )     (17,189  )                                                Net loss                                   (96,046  )                                                                                            Additional   information                                                                                       Segment assets        2,017,859        590,939        191,523        2,800,321       Investments by the equity   method        9,725        -        93,788        103,513       Unallocated assets                                   133,656                                                   Total consolidated assets                                   3,037,490                                                                                               Segment liabilities        256,994        102,603        51,160        410,757       Unallocated liabilities                                   2,166,128                                                   Total consolidated   liabilities                                   2,576,885                                                                                               Capital investments        127,521        8,008        5,728                Depreciation and   amortization        80,786        21,928        6,990               -46-   Granite Hacarmel Investments Limited and its Subsidiaries Notes to the Financial Statements as at December 31, 2003  Note 27 –  Segment reporting (contd.)          For the   year ended December 31, 2002                            Fuel   and Gas      Paint and   chemicals      Others      Consolidated                                              NIS thousands                                                                  Profit   and loss data:                                                                                        Income                                                                                        Net external sales         2,390,410        395,649        108,046        2,894,105       Sales within segments        -        -        -        -                                                   Total sales        2,390,410        395,649        108,046        2,894,105                                                                                               Results                                                                                       Segment results        140,991  *     42,217        (527  )     182,681       Unallocated expenses                                   (13,986  )                                                Income from operations                                   168,695       Financing expenses                                   (89,268  )    Financing income                                   4,131       Other expenses, net                                   (23,830  )    Taxes on income                                   (28,109  )*    Minority interest in results of subsidiaries                                   (2,268  )    Share in results of affiliated companies, net        (318  )     750        (5,616  )     (5,184  )                                                Net loss                                   24,167                                                                                               Additional   information                                                                                       Segment assets        2,071,957  *     630,926        225,280        2,928,163       Investments by the equity method        8,982        12,515        106,736        128,233       Unallocated assets                                   146,204                                                   Total consolidated assets                                   3,202,600                                                                                               Segment liabilities        253,856        83,415        45,526        382,797       Unallocated liabilities                                   2,186,350                                                   Total consolidated liabilities                                   2,569,147                                                                                               Capital investments        99,377        16,175        31,912                Depreciation and amortization        88,688        22,152        7,286               * Reclassified -47-    Granite Hacarmel Investments Limited and its Subsidiaries Notes to the Financial Statements as at December 31, 2003  Note 27 –  Segment reporting (contd.)          For the   year ended December 31, 2001                           Fuel   and Gas     Paint and   chemicals     Others     Consolidated                                             NIS thousands                                                                 Profit   and loss data:                                                                                       Income                                                                                       Net external sales        2,446,189        187,406        57,509        2,691,104       Sales among segments        -        -        -        -                                                   Total sales        2,446,189        187,406        57,509        2,691,104                                                                                               Results                                                                                       Segment results        *138,563        14,031        10,115        162,709       Unallocated expenses                                   (9,370  )                                                Income from operations                                   153,339       Financing expenses                                   (78,631  )    Financing income                                   3,009       Other expenses, net                                   9,825       Taxes on income                                   (36,270  )*    Minority interest in results of subsidiaries                                   (1,761  )    Share in results of affiliated companies, net        (928  )     -        933        5                                                                                               Net loss                                   49,516                                                  * Reclassified -48-    Granite Hacarmel Investments Limited and its Subsidiaries Notes to the Financial Statements as at December 31, 2003  Note 28 –  Collateral, commitments and contingent liabilities    A  Floating   and fixed charges       In consolidated balance sheet:                Dec. 31, 2003                                       NIS thousands     Secured   by                           Bank overdrafts     1,345        Floating charge on current assets of main investee   companies and on non-current inventories of a subsidiary.                           Short-term loans from banks     1,102,213        Charge on the shares of some of the investee   companies and on current assets, non-current inventories and on other assets   and on the land owned by some of the investee companies.                           Long-term loans from banks     933,663        Charge on the shares of some of the investee   companies.  Floating charge on current   assets and on non-current inventories of some of the main investee companies,   a charge on rights in land owned by    an investee company and a fixed charge on some of the fixed assets of   some of the investee companies (see Note 15b, and paragraph C2(a)).                           Investment grants     590        Current and floating charge on a portion of of the   fixed assets of subsidiaries.                           Rights of affiliated company     -        A first mortgage on all the rights of an investee company   in an affiliated company in order to secure 50% of the credit totaling NIS 75   million provided to the affiliated company.   -49-    Granite Hacarmel Investments Limited and its Subsidiaries Notes to the Financial Statements as at December 31, 2003  Note 28 –  Collateral, commitments and contingent liabilities (contd.)    B.   Contingent   liabilities and claims             1.   Indemnification   and insurance of officers                A special general meeting of the Company approved:        a.  Providing indemnity in advance for all eligible   directors and senior officers in the Company and its subsidiaries, in the   past, present and future, as of January 1, 1995. The undertaking to indemnify   is limited to types of events and amounts as detailed in the resolution   passed.                  b.  Providing an exemption in advance to all eligible   directors and senior officers in the Company and subsidiaries from total   liability due to damage as a result of the violation of the obligation to act   judiciously in regard to the Company.                  c.  Liability insurance of directors and senior officers   in the Company and subsidiaries, in the past, present and future as of   January 1, 1995. Accordingly the Company insured the liability of directors   and senior officers for a total amount of 10 million US dollars.               2.  Pending   litigation               a.  Sonol is involved in four claims filed against it by   IDF invalids, operators of filling stations, who received the operating   rights within the framework of an arrangement between the invalids and the   rehabilitation department of the Ministry of Defense, the Israel Lands   Administration and the fuel companies:                     1.  One claim (from 1996) is for a declarative ruling on   the invalidity of agreements between the operator and Sonol on the contention   that they are restraint of trade agreements prohibited under the Law for   Restrictive Trade Practices. The operator’s claim was rejected by the   court.  The operator filed an appeal   to the Supreme Court in which he contests the factual findings and the legal   conclusions. The appeal was referred to mediation which was   unsuccessful.  Therefore, the appeal   will be heard.  The Supreme Court   combined the hearings of this claim together with a number of similar claims   filed against another fuel company and even requested the Attorney General to   join the proceedings and express his stand on the questions in principle   arising therefrom.  (To provide a   complete picture: In cases of similar claims against another fuel company,   divergent rulings were handed down.    In one, the operator’s contentions were accepted, and in another they   were rejected.  Appeals were filed   with the Supreme Court against these rulings).  In the opinion of the company’s management, based on the opinion   of its legal counsel, it is not possible to determine at this stage what the   Attorney General’s position and the outcome of the appeal will be. The ruling   regarding this claim will affect the legal proceedings in other claims in   which IDF invalids are involved.   -50-    Granite Hacarmel Investments Limited and its Subsidiaries Notes to the Financial Statements as at December 31, 2003  Note 28 –  Collateral, commitments and contingent liabilities (contd.)    B.   Contingent   liabilities and claims (contd.)             2.   Pending   litigation (contd.)                         2.   Another IDF invalid operating a filling station in   1999 submitted a suit to receive declarative relief on the contention that   the series of agreements between him and Sonol were restraint of trade   agreements and therefore null and void.    In addition the plaintiff request to declare that the agreement to   appoint an operator includes discriminatory conditions in a standard contract   and that Sonol be required to pay an amount of approximately NIS 2 million   and this due to the excessive prices he claims Sonol charged him over years.  The case is at the stage of presenting   proof. In the company’s management’s opinion, based on the opinion of its   legal advisors, the ruling in this case as far as it relates to the claims of   a restraint of trade arrangement, will be the same as the above claim.  If the claim that the agreements are   invalid due to their being restraint of trade arrangements is not accepted,   then the chance of Sonol’s defense as far as it relates to the financial   claim against Sonol, are reasonable or even good.  Sonol sued the operator for the non-payment of a debt and for   breach of agreement between them and informed him of the cancellation of the   agreement and of his appointment as the operator of the station.                        3.  An additional IDF invalid, operator of a filling   station, whose eviction from the station he operates is being demanded by   Sonol, due to his not paying for products purchased, filed a counterclaim in   2003 claiming an amount of approximately NIS 2.5 million both from Sonol and   another fuel company, contending restraint of trade and discriminatory   conditions in a standard contract.  In   the company’s management’s opinion, based on the opinion of its legal   advisors, Sonol’s defense prospects in all aspects relating to the claim of a   binding restraint of trade agreement are good in view of the verdict in the   claim described in paragraph 1 above.                        4.  Other operators, heirs of an IDF invalid, filed a   claim in September 2003  against Sonol   in which they claimed both declarative relief claiming that the series of   agreements between the parties is a restraint of trade agreement and that the   terms of the engagement have discriminatory or restrictive terms in a   standard agreement, and also a financial claim for NIS 15 million.  Due to the early stages of the claim it is   not yet possible to assess its prospects.   -51-    Granite Hacarmel Investments Limited and its Subsidiaries Notes to the Financial Statements as at December 31, 2003  Note 28 –  Collateral, commitments and contingent liabilities (contd.)    B.   Contingent   liabilities and claims (contd.)             2.   Pending   litigation (contd.)                   b.   Sonol is involved in a number of claims filed   against it (not by IDF invalids) on the contention of a restraint of trade   agreement:                        1.  In the years 1993-1995 three claims were filed against   a formerly affiliated company and against its shareholders, which included   Sonol. The total claims amount to approximately NIS 65 million for the sale   of fuel pursuant to restrictive practices (as the plaintiffs allege) among   the fuel companies.  In the opinion of   the company’s management, based on the opinion of its legal advisors, Sonol   and the formerly affiliated company, have sound defenses against the claims   and they will not bear any additional costs over and above those already   provided due to any remaining doubt .                        2.  In 1999, an agency of Sonol, which also operates   stations on its behalf, filed a claim against Sonol asking for declarative   and monetary relief.  The agency   claims that the agreement in effect with Sonol, in regard to one of the   stations is a restraint of trade arrangement, and is also a uniform contract   with discriminatory provisions and as thus void.  In addition the agency is asking that the station be “freed”   under the terms of  the arrangement   with the Controller of Restrictive Trade Practices, and is, therefore,   requesting declaratory relief from the court regarding the cancellation of   rights granted Sonol to the land on which the station is located, including   leasehold and other proprietary rights. The agency is also asking that Sonol   be required to pay approximately NIS. 17 million on account of the inflated   prices which Sonol is alleged to have charged over the years. It should be   noted that Sonol filed a monetary counterclaim against the same agency in the   amount of approximately NIS. 20 million on account of amounts due from the   agency from the purchase of fuel products.             At this time, the company’s management, based on the   opinions of its legal counsel is unable to assess the defense prospects in   regard to the alleged restrictive agreement. Should the district court rule   in favor of this claim, there is also a risk that the court will accept the   monetary claim against Sonol (which, even in such case, the amount of claim   is by all accounts exaggerated). If the agency’s claim of a restrictive   agreement is not accepted by the court, the prospects of the monetary claim   against Sonol, are weak.   -52-    Granite Hacarmel Investments Limited and its Subsidiaries Notes to the Financial Statements as at December 31, 2003  Note 28 –  Collateral, commitments and contingent liabilities (contd.)    B.   Contingent   liabilities and claims (contd.)             2.   Pending   litigation (contd.)                   3.   In 2000, the operators of one of Sonol’s filling   stations, against whom Sonol filed a claim in the district court in Tel-Aviv,   instituted legal proceedings against Sonol. The operators requested a   declarative judgement stating that inasmuch as a filling station operated by   them was to be “freed” under the terms of the arrangement reached between the   fuel companies and the Controller of Restrictive Trade Practices, the   contractual relationships between them and Sonol should be related to as   having been terminated. It was also claimed that all agreements between the   plaintiffs and Sonol be considered restrictive agreements and, thereby,   cancelled. In addition, the above operators are claiming an amount of  approximately NIS 16 million from Sonol,   alleging having paid exorbitant prices on account of the fuel products they   purchased, and maintaining that inasmuch as the contractual arrangements   between them and Sonol have been terminated as claimed in the other   proceeding, Sonol  had no right to   charge such prices. In the opinion of Sonol’s legal counsel defense prospects   are good. At this stage, the company’s management, based on the opinion of   its legal counsel, are unable to determine the defense prospects regarding   the claim of a restrictive agreement.    If this claim by the station operators is accepted there is a risk   that the financial claim against Sonol will also be accepted (even though, in   such a case, the amount of the claim is exaggerated). Should the above claim   regarding a restrictive agreement not be accepted, the prospects of the   financial claim against Sonol will be weak.                  4.  In the year 2000, former operators of a filling   station filed a monetary claim against Sonol in the amount of approximately   NIS 4 million on account of alleged exorbitant prices paid for fuel products   purchased from Sonol, maintaining that the contractual arrangements between   them and Sonol have been cancelled and/or terminated, being restrictive   arrangements. At this time, the company’s management, based on the opinions   of its legal counsel, are of the opinion that Sonol’s defense claims,   although difficult to assess, are not insignificant. The matter was referred   to mediation which was unsuccessful and, therefore, the case will be heard   before the court.                  5.  In December, 2001 filling station operators filed a   claim in court against  Sonol asking   for declarative relief, by granting them rights in the station, preventing   Sonol from terminating the agreement appointing them as the station operators   and integrally connecting theirs and Sonol’s rights to the station.   Furthermore, they asked the court to be recognized as protected tenants   regarding the station. In addition, they asked the court to declare the agreements  between   them and Sonol to be a restrictive trade arrangement and to order Sonol to   sell them fuel products at “free market” conditions and prices. The station   operators are also asking for an amount of approximately NIS. 5 million,   claiming that as a result of a restrictive trade arrangement, Sonol charged   them prices in excess of those they would have paid in the free market, and   alternatively, claiming that Sonol acted in a prejudiced way against them by   charging them higher prices than those which it sells to other operators and   agents. Sonol submitted its defense and, also filed a counterclaim for the   eviction of the station operators. In the opinion of the company’s legal   counsel, Sonol has a sound defense albeit, at this time, they are unable to   predict the defense prospects   -53-    Granite Hacarmel Investments Limited and its Subsidiaries Notes to the Financial Statements as at December 31, 2003  Note 28 –  Collateral, commitments and contingent liabilities (contd.)    B.   Contingent   liabilities and claims (contd.)             2.   Pending   litigation (contd.)                      regarding the claim of a restrictive trade  arrangement. If the claim to nulify the   agreements on the grounds that they are a restrictive trade arrangement is   not accepted, then, on the basis of the facts and information submitted to   legal counsel stating, inter-alia, that the station and agency in question   purchased fuel products at similar prices as those paid by other filling   stations of the same type within the Sonol network of stations and other   agencies, then in the opinion of the company’s management, based on the   opinion of its legal counsel, Sonol’s defense prospects as they relate to the   financial claim are reasonable.                   6.  Following the filing of a claim against   Dan–Cooperative for Public Transportation Ltd (“Dan”) in the amount of NIS.   1.6 million for the return of equipment loaned to Dan by Sonol for the   construction of an internal filling station, in accordance with an agreement   signed between Dan, Sonol, Paz Oil Company Ltd., “Delek” the Israel Fuel   Corporation Ltd. and Sonol, Dan, in June 2002, submitted a counterclaim in   the magistrate’s court in Tel-Aviv in the amount of NIS. 10 million. In its   counterclaim, Dan contends that the agreement signed with the three  fuel companies is illegal and, being a   restrictive arrangement entered into as a result of the companies taking   advantage of their monopolistic power, is therefore, null and void. Dan   maintains that during the period between 1980-1989 when it purchased fuel   products from the fuel companies, it paid exorbitant prices in amounts   totalling NIS. 15 million. However, due to the cost of the court fee, its   counterclaim was submitted in an amount of NIS. 10 million, all against   sonol, although Sonol’s share of this claim amounts to approximately NIS. 2   million. In the opinion of the company’s management, based on the opinion of   its legal counsel, Sonol’s defense prospects are more favorable than those of   the plantiffs.   -54-    Granite Hacarmel Investments Limited and its Subsidiaries Notes to the Financial Statements as at December 31, 2003  Note 28 –  Collateral, commitments and contingent liabilities (contd.)    B.   Contingent   liabilities and claims (contd.)             2.   Pending   litigation (contd.)                   7.   In February 2003, the operators of another filling   station submitted a claim for declarative relief according to which the   agreement between it and Sonol was a restrictive trade arrangement, and that   the station should have been released within the framework of the arrangement   between the fuel companies and the Controller of the Restrictive Trade   Practices.  In addition it was claimed   that the agreement is a uniform contract and includes discriminatory   conditions.  The plaintiffs requested   approval to divide the relief in such a way that after the requested   declarative orders are issued, they will be able to claim compensation from   Sonol for loss of profits, violations and other injustices. Sonol filed a   defense claim and a counterclaim in which it asks for the eviction of the   operators from the station and a monetary claim of NIS 1 million. The parties   are engaged in arbitration proceedings. In the opinion of the Company’s   management, based on the opinion of its legal counsel, at this stage it is   not possible to assess the prospects of the claim, although Sonol’s   counterclaim is well founded.                  8.  During 2003 the operator of a filling station filed   a claim for declarative relief, claiming that its agreement with Sonol is a   restrictive trade arrangement’ and also filed a financial claim for NIS 2.4   million.  In view of the early stages   of this claim it is not yet possible to estimate its chances.            c.  In February 2000 a motion was filed against Sonol,   together with Paz Oil Company Ltd. and “Delek” the Israel Fuel Corporation   Ltd. to allow a class action relating to the alleged collusion in the price   fixing of gasoil to consumers.  This   claim, after being updated and, if allowed as a class action, will amount to   approximately NIS. 244 million, of which Sonol’s share is approximately NIS.   57 million. Sonol rejects the claim outright and, in the opinion of the   company’s management, based on the opinion of its legal counsel, chances are   reasonable to good that it will not be allowed as a class action.            d.  Additional claims filed against Sonol are:               1.  Pi Gliloth Petroleum Terminals and Pipeline Ltd.   filed a monetary claim against the Petroleum Products Pipeline Ltd. and the   fuel companies Sonol, Paz and Delek and Dor for a total amount of NIS 8   million.  The plaintiff contends that,   by law,  it was entitled to a payment   from the defendants for storing fuel products in its storage and transfer   tanks it owns in its Ashdod installation.    The total amount claimed from Sonol is approximately NIS 1   million.  The claim has been forwarded   to arbitration.  In the opinion of the   Company’s management, based on the opinion of its legal counsel, prospects   are favorable that the claim will be rejected.   -55-    Granite Hacarmel Investments Limited and its Subsidiaries Notes to the Financial Statements as at December 31, 2003  Note 28 –  Collateral, commitments and contingent liabilities (contd.)    B.   Contingent   liabilities and claims (contd.)             2.   Pending   litigation (contd.)                   2.   Petroleum Infrastructures Ltd. filed a monetary   claim in a summary procedure for a total amount of NIS 2.7 million against   Paz, Delek and Sonol on account of the netting of the said amount by the   defendants under the pretext that the gasoil stored by the plaintiff on their   behalf was,at some stage, deleted from its records.  The amount claimed from Sonol is NIS 0.7 million. In the   opinion of the Company’s management, based on the opinion of its legal   counsel, Sonol’s  defense prospects   are good.                  3.  Claims were filed by groups of greenhouse owners   against Sonol, Oil Refineries Ltd., Paz, Delek and Alon, claiming that damage   was caused to them in an amount of NIS 11.4 million (Sonol’s share is NIS 7.3   million) due to the use of defective light fuel manufactured by the Oil   Refineries Ltd. and sold to them by the fuel companies.  In the opinion of the Company’s   management, Sonol has a sound defense against this claim and is covered under   the terms of a product liability policy.                  4.  In August, 2001 Petroleum and Energy Infrastructures   Ltd. and Oil Products Pipeline Ltd. (“plaintiffs”) filed a claim in the   amount of NIS. 7 million against Sonol and two other fuel companies.   According to the plaintiffs, who are engaged in the pumpover of fuel products   through a network of pipelines, they also serve as a “clearing house” for the   defendants whereby the defendants sell and buy the excess/shortage of amounts   of fuel that have accumulated. The plaintiffs claim that Sonol and others unlawfully   netted amounts from payments due to them, thus causing them financial losses.   The amount claimed from Sonol is approximately NIS. 1.3 million on the   grounds of unlawful enrichment. The parties were referred to arbitration. In   the opinion of its legal counsel, inasmuch as the claim is at an early stage,   it is difficult to assess its prospects. Nevertheless Sonol has good defense   claims.                  5.  In 2000, an operator of a filling station submitted   a claim against Sonol in an amount of NIS 3 million for commission   differences due him on account of prior years.  The claim was filed following the filing of an eviction claim   by Sonol against the station operator.    In the opinion of the company’s management, based on the opinion of   its legal counsel, the prospects of the claim against it succeeding are weak.                  6.  In April 2001 Sonol filed a series of claims against   four of its station operators for their eviction from all four stations and   also for the recovery of a debt in the amount of NIS. 9.5 million. The   defendants claimed that Sonol entered into a new agreement with them which   granted them the right to continue operating the stations for an additional   period, and simultaneously, the station operators filed a counter claim for   damages in the amount of NIS. 10 million.   -56-    Granite Hacarmel Investments Limited and its Subsidiaries Notes to the Financial Statements as at December 31, 2003  Note 28 –  Collateral, commitments and contingent liabilities (contd.)    B.   Contingent   liabilities and claims (contd.)             2.   Pending   litigation (contd.)                      In November 2002, the Tel-Aviv magistrate’s court   ruled in favor of Sonol for the defendants’ eviction, and the stations were   returned to Sonol. The mutual monetary claims have not yet been heard by the   court. In the opinion of the Sonol’s management, based on its legal counsel,   the prospects in regard to the claim against Sonol are weak, while, on the   other hand, Sonol’s prospects are high regarding its claim against the   station operators.                   7.  A ruling issued in October 2002 by the Jerusalem   district court rejected, within the framework of a third party notice, all   the claims to repay an investment in public filling stations submitted by the   owners of various public filling stations against Sonol. The claim against   Sonol amounted to NIS 43 million. An appeal has been filed with the Supreme   Court against the verdict. In the opinion of the company’s legal   counsel,  the prospects of the appeal   are not high.            e.  Supergas is involved in class and other actions as   follows:               1.  In April 1999 a claim in the amount of NIS 8 million   was filed against Supergas and four other gas companies, in the Tel Aviv   district court by several consumers pursuant to Regulation 29 of the Civil   Procedures Law, and after its amendment, additional grounds were added   pursuant to the Law for the Protection of the Consumer and the claim stood at   an amount of only NIS 4.9 thousand for so-called violation of the gas   companies’ obligation to conduct periodic inspections of the gas equipment in   the possession of consumers and for selling a product while misleading   consumers, causing damage, loss of convenience and harm to safety, while   endangering the lives of consumers.    The plaintiffs request that the court order the defendant gas companies   to carry out the periodic inspections, to pay them compensation for the above   amount - approximately NIS 0.8 thousand per plaintiff - and/or to give a   declarative order stipulating that the plaintiffs are entitled to a refund of   the amounts that they paid to the defendants from the date agreements were   entered into and additional similar orders.    In addition, the plaintiffs requested the court to consider the claim   as a class action.  The court   approved, only partially, the filing of a class action for declarative relief   only, under the Consumer Protection Law, regarding the responsibility of the   gas companies to refund to  their   customers amounts paid by them for periodic examinations which were not made,   retroactive to  the date of the   engagement with each consumer.  The   court rejected the claim for monetary relief and other relief against the gas   companies. In April 2003 the district court ruled that it is not possible to   approve the class action pursuant to Regulation 29 of the Civil Proceedings   Regulations, and this as the result of a verdict by  the Supreme Court regarding Regulation 29.  Recently, the parties issued notices on   their behalf regarding the ramifications of the district court’s ruling on   the procedures for the application for a right of appeal.  In addition, the plaintiffs filed a   request for a separate right to appeal on their behalf regarding the above   decision not to approve the claim as a class action based on Regulation 29.   -57-    Granite Hacarmel Investments Limited and its Subsidiaries Notes to the Financial Statements as at December 31, 2003  Note 28 –  Collateral, commitments and contingent liabilities (contd.)    B.   Contingent   liabilities and claims (contd.)             2.   Pending   litigation (contd.)                     In the opinion of its legal counsel, Supergas has   good grounds for appeal both on the factual and legal points of view.  In the opinion of the company’s   management, the provision included in Supergas’ books for any possible   exposure, if at all, due to the unclear situation, is sufficient.                        2.  In June, 2001, a claim was filed in the Tel Aviv   district court against Supergas, together with a request that the claim be   recognized as a class action, in the amount of NIS. 131 million.   Concurrently, Supergas was informed of two additional claims filed against   two other gas companies and to which Supergas was included on a formal basis   only. The plaintiffs claim they are Supergas’ customers of central gas and   contend, inter-alia, that Supergas and other gas companies unlawfully charge   their customers a periodic fixed    charge which was not agreed upon in contracts signed between them and   Supergas.  Therefore, they contend   that Supergas should refund the amounts paid and, in addition, should make an   “appropriate” compensatory payment in a manner as to be determined by the   court.             In a preliminary hearing, the court decided that the   three claims and the request to approve them as class actions, submitted   against Supergas and two other gas companies will be heard jointly.  In the opinion of the company’s   management, based on the opinion of its legal counsel, and on information   available at this time, Supergas’ prospects    of success seem greater than those of the plaintiffs.                        3.  In December 2003, a claim in the amount of at least   NIS 1 billion was filed against Supergas and also against Pazgas  Amisragas and Dorgas, together with a   request that the claim be recognized as a class action, claiming that between   the years 1994 and 2003 restrictive trade arrangements were in force in the   private and the commercial gas markets.    The company submitted its response to the request rejecting it   outright.  The claim is not   accompanied by any firm evidence supporting its contentions, and has serious   flaws and, therefore, the company’s management believes, based on the opinion   of its legal counsel, that its prospects are poor.                        4.  In September 2003, the Controller of Restrictive   Trade Practices informed Supergas of its intention to issue an indictment   against the company  for violations of   the Law for Restrictive Trade Practices. A draft letter of indictment was   attached regarding the  four gas   companies and those who were their managers at that period, claiming that   they participated in restrictive trade arrangements. Supergas was asked to   voice its contentions in a hearing procedure.  Supergas responded and its representatives met with   representatives of the Restrictive Trade Practices Authority to present its   contentions.  All Supergas’ managers   at that time deny outright any participation in restrictive trade   arrangements.  To date, no indictment   has been filed.   -58-    Granite Hacarmel Investments Limited and its Subsidiaries Notes to the Financial Statements as at December 31, 2003  Note 28 –  Collateral, commitments and contingent liabilities (contd.)    B.   Contingent   liabilities and claims (contd.)             2.   Pending   litigation (contd.)                      5.   Investigations are being carried out against   Supergas by the Israel Police and the Ministry of Energy regarding the death   of a customer resulting from the emission of poisonous gas from gas   heaters.  No recommendation has yet   been received from the Israel police or the district attorney’s office.                  f.  In November, 2002, a claim for declarative relief   was filed against a limited partnership, in which the Company holds a 35%   interest, claiming that a project constructed and managed by the limited   partnership was illegally taken from a resource project written by the   plaintiffs while they were students working on their master’s degree in   business administration. According to the plaintiffs, the research project   included a business plan and feasibility studies to be used in constructing a   similar project and that use of their research  project in building the project constitutes unjust enrichment,   the theft of proprietary secrets, breach of trust and a breach of contractual   liability. In February 2003, the limited partnership submitted its defense   denying outright, all the contentions of the plaintiffs and noting the main   differences existing between the outline proposed in the plaintiffs work and   the outline in the venture as actually planned and constructed, which   reinforce the conclusion that no use was made of the plaintiffs’ work.  In July 2003, the plaintiffs submitted   their response to the defense in which they disagree with part of the   defense’s contentions.  In the opinion   of the limited partnerships’ management, based on the opinion of its legal   counsel, the partnership has a sound defense against the claim.                  g.  Additional claims (most of them legal) in the normal   course of business have been filed against subsidiaries and affiliated   companies.                  In the opinion of the Company’s management , the   provisions made to cover the results of the claims detailed above are   sufficient.               h.  For additional claims against Sonol and Supergas,   see below Note 31 – Subsequent events.   -59-    Granite Hacarmel Investments Limited and its Subsidiaries Notes to the Financial Statements as at December 31, 2003  Note 28 –  Collateral, commitments and contingent liabilities (contd.)    C.   The   subsidiaries have commitments and liabilities on the balance sheet date as   follows:               1.   Commitments   for investments:              NIS thousands                        Acquisition of fixed assets     116,770          Supply of fuel, oil and equipment (delivery January   – December 2004)     572,701          Executing projects     64,380          Rental and leasing of stations, installations and   buildings from agents     according to signed agreements*     1,296,618          Leasing and rental of a computer and peripheral   equipment for a period   of up to a year     4,183          Automobile operating lease agreements**     9,768          Amounts payable for management services (See Note   30b).     4,204          Amounts payable for consulting services (See Note   30b).     368                           * Following are dates of payment of the rental and   leasing liabilities:                2004     104,670          2005     95,813          2006     90,908          2007     84,997          2008     81,085          2009 and thereafter     839,145                                 1,296,618                                            ** Following are the dates of payment of liabilities   for operating lease   agreements for vehicles:                2004     5,522          2005     3,277          2006     969                                 9,768                              2.   Commitments   for investments:                  a.   In 1998 a subsidiary entered into a joint venture   for the construction of a building project on jointly owned land. Construction,   which began in September 2000 will include, inter alia, a 27 story office   building covering an area of approximately 27,000 sq. meters and   underground  parking facilities.          Simultaneously, an agreement was signed between the   partners in the joint venture and a bank for financial escort over the   construction period.  In return, the   subsidiary pledged its rights in the land and future receipts from the   project to the lending bank.            As of date of the financial statements the   subsidiary had not yet utilized the project financing put at its disposal.   -60-    Granite Hacarmel Investments Limited and its Subsidiaries Notes to the Financial Statements as at December 31, 2003  Note 28 –  Collateral, commitments and contingent liabilities (contd.)    C.  The   subsidiaries have commitments and liabilities on the balance sheet date as   follows:  (contd.)            2.  Commitments   for investments: (contd.)                  b.  On September 30, 2001, an agreement was signed   between the Company and Naspen Ltd., a member of the Baran Group Ltd.,   whereby the parties to the agreement will invest, in equal shares, in a new   company, Oganim Beyarok Ltd. (50% each), which will engage in Israel and   globally in leasing land and masts for the construction of antennas  for communications equipment (TM – Tower   Management).  Granite will invest up   to approximately 5 million US dollars in accordance with the agreement.  As of the balance sheet , the Company   invested an amount of NIS 2.9 million.                  c.  A subsidiary constructed a water treatment plant   which it has undertaken to operate for a period of 10 years .                  d.  Subsidiaries have agreements to pay royalties for   know-how purchased as a percentage of the sales of certain products.  In the past three years a yearly amount of   approximately  NIS 1 million was  paid.                  e.  Via Maris Desalination Ltd.          (1)  A consortium of companies in which the Company is a   member , was awarded a tender for the desalination of seawater.  For this purpose the consortium formed a   company, Via Maris Desalination Ltd. (hereinafter: Via Maris).  The Company’s share in Via Maris is 26.5%.             In October 2002 Via Maris signed an agreement with   the State of Israel (hereinafter: Concession Agreement) which was approved by   the Finance Committee of the Knesset, to plan, finance, construct, operate   and maintain a seawater desalination plant having an annual capacity of 30   million cubic. meters under the BOO (build, own and operate) method   (hereinafter- the Project).                           The concession agreement is for a period of 24 years   and 11 months and includes the period of construction (hereinafter-   Concession Period).  During the   concession period Via Maris is obligated to construct a desalination plant   with an annual production capacity of 30 million cubic. meters.  In return, Via Maris will be entitled to   receive a fixed payment for providing available desalination capacity and a   variable payment for the quantities of water actually desalinated. The   quantity of water to be desalinated will be determined yearly on the basis of   an annual program prepared by Via Maris and approved by the  Desalination Administration according to a   formula detailed in the concession agreement.  The water that Via Maris will supply to the State must meet the   quality requirements stipulated in the concession agreement   -61-    Granite Hacarmel Investments Limited and its Subsidiaries Notes to the Financial Statements as at December 31, 2003  Note 28 –  Collateral, commitments and contingent liabilities (contd.)    C.   The   subsidiaries have commitments and liabilities on the balance sheet date as   follows:  (contd.)             2.   Commitments   for investments: (contd.)                            The shareholders of Via Maris provided a performance   guarantee to the State of Israel in the amount of NIS 35 million, of which   the Company’s share is approximately NIS 9.3 million.  At the time the financing agreements with   the banks will be approved by the Desalination Administration, the   shareholders will increase their guarantee to NIS 92.5 million of which the   Company’s share will be approximately NIS 24.5 million.  Total guarantees that the Company provided   Via Maris as of the balance sheet amounts to NIS 9.8 million.                            In accordance with the provisions of the concession   agreement, Via Maris is required, inter alia, to complete most of the   planning and licensing stages of the project and to obtain most of the   licenses required for the construction of the project within 8 months of the   signing of the concession agreement.                             The general planning of the desalination plant has   reached  90% of completion and the   detailed planning reached approximately 30%. The weighted average of progress   in the planning stood at approximately 55% as of the date of the financial   statements.                           Via Maris submitted all the applications for licensing   to the relevant authorities (the Shorkut Local Committee, the Central   District Committee and the Committee for the Coastal Waters). In addition,   the approvals in principle were received from the planning division and the   National Parks Authority for the route of the land and sea lines.    Notwithstanding this, the licensing   procedures have not yet been completed mainly due to the continuing sanctions   by the civil servants.  In addition,   since the date of signing the concession agreement, there were significant   changes in the financial markets, as a result of which the economic   feasibility of the project deteriorated.    For example, there was a significant devaluation in the rate of   exchange of the shekel – euro and an increase in the rate of the interest   margin that the banks demand.                           As a result, Via Maris requested that the State make   certain adjustments to the concession agreement, including: extending the   period of linkage of the fixed component of the price of water to the basket   of currencies until such time as the plant becomes operable, delaying the   date for updating the fixed component of the price of water in accordance   with changes in the rates of interest as of    the  date when the plant   becomes operable, compensation to Via Maris in the event of a delay supplying   natural gas or in the event that its price will higher than expected,   delaying the timetables of the project by 8-12 months and changing the nature   of the engagement with a certain supplier to the project.   -62-    Granite Hacarmel Investments Limited and its Subsidiaries Notes to the Financial Statements as at December 31, 2003  Note 28 –  Collateral, commitments and contingent liabilities (contd.)    C.   The   subsidiaries have commitments and liabilities on the balance sheet date as follows:  (contd.)             2.   Commitments   for investments: (contd.)                      From the State’s responses to Via Maris’ request ,it   appears that  the requests were only   partially accepted. The State agreed, in principle, to extend the period of   linkage of the fixed component of the price of water to the basket of   currencies, subject to receiving a certain discount in the price of water,   but did not respond to Via Maris’ request regarding the natural gas.  Regarding the timetables, the State   demanded that Via Maris fulfill the obligations undertaken in the agreement   by the date stipulated (as defined in the concession agreement), such as   signing the financing agreement by April 1, 2004, but did not approve the   concurrent deferral of the duration of the concession agreement.                      Following the receipt of the State’s response to Via   Maris’ requests, Via Maris prepared an updated version of the project’s   economic model, a copy of which it submitted to a bank which expressed   interest in financing the project.    The bank has not yet completed examining the updated economic model,   but has clarified that it will require Via Maris’ shareholders to guarantee   the risk inherent in a delay in the supply of natural gas to the desalination   plant.                     Via Maris is engaging its full resources in order to   meet the required timetables.  At this   stage, Via Maris cannot determine whether it will meet the project’s updated   timetables, also due to factors beyond its control. A delay in meeting the   timetables may be considered to be a violation of the terms of the  concession agreement and to enable the   State, under certain circumstances, to exercise the performance guarantee.   Nevertheless, in the opinion of Via Maris’ management, inasmuch as most of   the delays result from unforseen factors, not under Via Maris’ control, the   likelihood that the State will not approve an additional deferral in the   timetables is small.                     Construction of the project will be carried out by a   partnership which will comprised of Via Maris’ shareholders (subject to a subsidiary   replacing the Company) (hereinafter: the construction partnership)  The construction partnership will enter   into  a Turn-Key agreement with Via   Maris which will ensure the construction of the desalination plant at a price   and timetable to be determined in advance.    The partners in the construction partnership will be jointly and   severally responsible for meeting its obligations Furthermore, the   obligations of the construction partnership will be secured by a bank   guarantee in an amount to be agreed upon between the parties.                     Operation and maintenance work on the project will   be carried out by a partnership to be comprised of Via Maris’ shareholders   (subject to the subsidiary replacing the Company) or by a private company   which will be owned by the same parties.    According to the agreement between the partners in Via Maris, the   subsidiary has a first right of refusal regarding operating the desalination   plant during the full term of the agreement.   -63-    Granite Hacarmel Investments Limited and its Subsidiaries Notes to the Financial Statements as at December 31, 2003  Note 28 –  Collateral, commitments and contingent liabilities (contd.)    C.   The   subsidiaries have commitments and liabilities on the balance sheet date as   follows:  (contd.)             2.   Commitments   for investments: (contd.)                            Via Maris intends to supply the energy required to   operate the desalination plant, both through a private power station, powered   by natural gas, which will be constructed on the plant’s grounds and through   purchases from the Israel Electric Corporation.                            The timetable for operating the facility is not   contingent on the completion of the power station, and its initial operation   is planned on the basis of electricity to be supplied by a high tension line   which will pass close to the plant.                           The total costs related to constructing the   desalination plant are estimated at approximately 80-85 million dollars   (including the power station).                        (2)  In accordance with an agreement signed between the   Company and a subsidiary, the subsidiary will serve as the operative wing of   the Company regarding the water treatment and the construction of   desalination plants.  Subject to the   approval of the Tenders Committee and provided that the State will give its   approval in the future, Via Maris’ shares held by the Company, will be   transferred to a subsidiary at an adjusted cost as reflected in the Company’s   books.  It was agreed between the   companies that the aforesaid does not derogate from the Company’s legal and   financial responsibility in all matters relating to its being awarded the   tender and the construction of the project.    In addition the subsidiary has undertaken to assume by itself and on   its own account, all the expenses and investments, of any type, that were   paid or will be paid by the Company in connection with submitting the tender   offer or for being awarded it within the framework of Via Maris and in every   matter concerning or resulting from the tender or the project.  Accordingly, the costs of the investments   will be included in the books of the subsidiary. The Company intends to   assign the guarantees that it provided Via Maris to the subsidiary, subject   to receiving the required approvals.                        (3)  As of the date of the financial statements the subsidiary’s   share in Via Maris’ shareholders’ loans is NIS 3,541 thousand.  The loans are linked to the consumer price   index.                           As of the balance sheet date, an investment in the   amount of NIS 4,132 thousand, including shareholders’ loans and the capitalization   of various expenses,  was recorded in   the subsidiary’s books.   -64-    Granite Hacarmel Investments Limited and its Subsidiaries Notes to the Financial Statements as at December 31, 2003  Note 28 –  Collateral, commitments and contingent liabilities (contd.)    C.   The   subsidiaries have commitments and liabilities on the balance sheet date as   follows:  (contd.)             2.   Commitments   for investments: (contd.)                f.   In October 2002 a partnership agreement was signed   in equal shares between a subsidiary and Hefer Ecologies Aguda Shitufit   Agricultural Cooperative Ltd. (hereinafter: “Hefer”).  According to the agreement, the   partnership will engage in the construction of a plant for the treatment of   agricultural residues (hereinafter: “Residues Plant”) and its operation in   the Emek Hefer area.          In November 2003 the partnership agreement was   amended  to include the following   provisions:          Hefer will pledge all the Residues Plant’s equipment   to the bank that will provide construction financing to the partnership for   the plant and equipment. The partnership will be granted the right of use of   the Residues Plant’s  facilities for a   period of 20 years commencing from the time of collection of customer   receivables from the Residues Plant’s customers. Under certain   conditions,  the period can be   extended to 24 years.          All the income earned by the Residues Plant will   belong to the partnership.          Each of the parties will provide shareholders’ loans   to the partnership in the amount of NIS 2.5 million.  The partnership will receive financing   from the bank in the amount of NIS 7.5 million and will provide Hefer with a   long-term loan to finance the construction of  the Residues Plant in the amount of NIS 12.5 million.          As of the balance sheet date the shareholders loan   from Hefer had not yet been received.          Hefer announced that its application for a grant   from the State to construct the Residues Plant for 50% of the actual costs up   to an amount of NIS 10 million was approved by the Investments Administration   of the Ministry of Agriculture.    Should the amount of the grant received be less than stated above,   Hefer will be responsible for the balance.          If the total estimated cost of the Residues Plant   exceeds NIS 22.5 million the partnership will raise the balance of the   investment required from a banking source with guarantees by the two partners   in equal shares.          As of the date of the financial statements the   construction of the Residues Plant has not yet been completed.   -65-    Granite Hacarmel Investments Limited and its Subsidiaries Notes to the Financial Statements as at December 31, 2003  Note 28 –  Collateral, commitments and contingent liabilities (contd.)    D.   Subsidiaries   have contingent liabilities on the balance sheet date as follows:                    NIS thousands                           1.     Acquisition of equipment – open letter of credit     584                                 2.     Bank gurantees for customers and investee companies     65,340                                 3.     Performance guarantees to customers and others     23,742                                 4.     Guarantees to the authorities     655                                 5.     Bank guarantees for credit and other liabilities of   affiliated   companies     474                                 6.     Other guarantees*     3,879                              7.     A guarantee to a government agency on account of the   liabilities of a subsidiary regarding its share in an oil and gas   exploration drilling agreement     Unlimited amount                           8.     A guarantee given on account of the liabilities of a   subsidiary   regarding participation in a tender     Unlimited amount                           9.     A guarantee to the State of Israel for grants that   an affiliated   company received from the Government of Israel in   accordance with Law for the Encouragement of Capital   Investments –1959     Unlimited amount          *   On April 1, 2004 a guarantee, which on the balance   sheet date stood at NIS 5 million will increase to NIS 13.2 million.  The guarantee was given in favor of the   State of Israel regarding compliance with the provisions of Section 3a of the   edict-Supervision of Goods and Services Prices (Prices at Filling Stations) –   2002.            E.  Credit   risks            1.  The maximium credit risk that the Company faces   regarding its financial assets does not exceed the amount of their book value   less existing collateral.            2.  The concentration of  credit risks results from a subsidiary having a number of  customers and long-term receivables   (long-term loans granted), which are of a similar nature (independent fuel   agents).  The highest balance is that   of an agent whose current debt (included in trade receivables) and  long-term debt (included in long-term   loans granted) amounts to approximately NIS 25.3 million.       A portion of amounts due from customers is   collateralized as is customary in the industry.  In addition, the subsidiary has long-term service agreements   which give it the right to offset amounts against the receivable payments.       The statements include a specific provision for   debts whose collection in management’s opinion is in doubt.   -66-   Granite Hacarmel Investments Limited and its Subsidiaries     Notes to the Financial Statements   as at December 31, 2003         Note 28 –  Collateral, commitments and contingent liabilities (contd.)    F.   Forward currency transactions              Currency   receivable     Currency   payable     Date of maturity /   redemption /   realization     Amounts   receivable     Amounts   payable     Fair   value                                                                           NIS   thousands                                             US dollars     NIS     (1)        2,199           2,204           (5  )             Euro     NIS     (1)        2,765           2,674           91                                                                        Total                          4,964           4,878           86                                                                        (1) January 2004                                                                G.   Fair value of financial instruments                The book amount of cash and cash equivalents,   short-term investments, trade receivables, other receivables, credit from   banks and others, liabilities for trade payables and other payables are equal   or close to their fair value.                Fair value as at December 31, 2003 of long-term   loans given, is higher by NIS 1.5 million than their book value.   Note 29 –  Events relating to the fuel sectorAccording to the Law for Arrangements in the State of Economy – 2001 and its regulations, changes have been enacted regarding the holding of Emergency inventories of fuel products. According to the new regulations the Security inventories are to be held in separate tanks at specified locations and earmarked for use in times of emergency.  In view of this, these inventories are presented as  Non-current inventories.  The State will continue to finance the holding of the inventories and guarantee the value of the fuel defined as Security inventories.  A regulation regarding holding of Civilian inventories, stipulated in the same law, was cancelled in 2002. Sonol is exposed to changes in the value of its operating inventories used to meet its current needs, as a result of fluctuations in fuel market prices.  Fluctuations in the fuel prices could significantly affect Sonol’s periodic business results.  Sonol is exploring ways to minimize such effects.  It is not possible to estimate the effects of these changes on Sonol’s business results. -67-    Granite Hacarmel Investments Limited and its Subsidiaries     Notes to the Financial Statements   as at December 31, 2003        Note 30 –  Transactions and balances with interested and related parties    a.  Income   and expenses from interested and related parties            1.  Consist of:             For the   year December 31,                           2003     2002     2001                                       NIS   thousands                           Interested   parties     Related   parties     Interested   parties     Related   parties     Interested   parties     Related   parties                                                   Financing income     -     338     -     925     -     846       Income from   management services     -     1,529     -     796     -     457       Purchase of fuel   products     195,359     -     341,143     -     400,992     -       Purchase of services     347     -     435     -     688     -          2.   In purchases from an interested party the price of   the transaction is determined by referring to the Oil Refineries Ltd. gate   price at that time and to the prices which were offered by other competing   suppliers.  The price of the   transaction at all times was lower than any other alternative that Sonol had   at that time.  The credit terms are   not less than those which were given by the Oil Refineries Ltd. or by any   other supplier.            3.  Other transactions with interested and related   parties are also conducted in the normal course of business and at regular   credit terms and do not exceed 10% of the Company’s transactions.  The Company was granted an exemption   pursuant to Section 64(3)d of the Securities Regulations [(Preparation of   Annual Financial Statements (Amendment)] – 1995 from the requirement to   disclose transactions with interested parties and investee companies in the   normal course of the Company’s business.            4.  Sonol purchases most of its fuel products from Oil   Refineries Ltd. which is obligated to supply its products to the fuel   companies  at refinery gate prices   which are controlled by the government.   -68-    Granite Hacarmel Investments Limited and its Subsidiaries     Notes to the Financial Statements   as at December 31, 2003        Note 30 –  Transactions and balances with interested and related parties (contd.)    b.   Benefits to interested parties                 For the   year ended December 31,                        Group        Number of   people     2003     2002     2001                                                         NIS   thousands                                                                 1.  Interested party employed   by the   Corporation     1-2     5,637  *  3,629     3,171                                          2.  Directors fees     12     1,190     1,044     1,072                                          3.  Management and consulting   services**           2,518     2,092     -          4.   Regarding indemnity and   insurance of directors and officers – see Note 28(b)(1)            5.  According to the employment agreement signed with   the Company’s Chief Executive Officer(CEO), the period of his employment will   be until June 2006 (which be extended automatically unless terminated by one   of the parties).  Should the Company   terminate the agreement and/or should control in the Company be transferred   within the meaning of the employment agreement, the CEO will be entitled to   receive the balance of the salaries that he would have received up to June   2006, but not less than for a period of 12 months.            *  Including payments to a former interested  party whose term ended  during 2003.            **  The Company has an agreement with an interested   party to pay $40,000 per month for management services for a period of 36   months beginning January 1, 2003.  The   expenses for the management services were approved at the General Meeting of   the Company.  In addition, the Company   entered into an agreement with an interested party to pay $7,000 per month   for consulting services.  Each of the   parties may terminate the agreement with prior notice of two months to the   other party.   -69-    Granite Hacarmel Investments Limited and its Subsidiaries     Notes to the Financial Statements   as at December 31, 2003         Note 30 –  Transactions and balances with interested and related parties (contd.)    c.   Balances with interested and   related parties              December   31, 2003     December   31, 2002                                 NIS   thousands     NIS   thousands                                 Interested   parties     Related   parties     Interested   parties     Related   parties                                       Current   assets                                                               Trade receivables     1,144     1,141     1,059     13,644       Other receivables     54     -     -     199                                             1,198     1,141     1,059     13,843                                       Loans and capital notes to   investee   companies           17,046           20,348                                       Highest balance during the   year with   an interested party     2,006           3,847                                             Current   liabilities                               Trade liabilities           2,932     32,842     3,595       Other liabilities     -     259     -     5                                             -     3,191     32,842     3,600                                       Highest balance during the   year with   interested party     32,489           47,004                                             Commitment for the   acquisition of   fuel from interested party     -           106,892                                            Note 31 –  Subsequent events    a.   In February 2004, Isramco   Inc, the operator of the “Med-Ashdod” holding, announced that the supply of   gas from the well ‘Nir-1”, in which the Company is a partner, holding 35% of   its rights, is not  economically feasibile.  The partners must inform the operator by   not later than March 29, 2004 of their intentions. The balance of the   Company’s investment in the holding’s concession rights is insignificant.            b.  In February 2004 the   Company submitted a proposal to Nitzba Hitnahalut for the purchase of Nitzba   Hitnahalut’s shares.  Concurrently,   the Company announced negotiations taking place for the sale of its holdings.            c.  In February 2004, Tambour   submitted a request to the Tel Aviv– Jaffa District Court for the approval of   a distribution pursuant to paragraph 303 of the Companies Law – 1999 and for   reduction in its capital deriving from the proposed distribution.  Tambour’s creditors may file an objection   in court against  the proposed   distribution within 30 days of the date of its filing the request or within a   later period as determined by the court.    Tambour intends to pay a cash dividend to the Company of an amount not   exceeding NIS 400,000 thousand, of which an amount not exceeding NIS 379,358   thousand is a distribution not out of its profits.   -70-    Granite Hacarmel Investments Limited and its Subsidiaries     Notes to the Financial Statements   as at December 31, 2003         Note 31 –  Subsequent events (contd.)    d.   Following a  claim filed by the fuel companies Paz,   Delek and Sonol and Dor Energy against the Oil Refineries Ltd., Oil   Infrastructures and Energy Ltd. and the State of Israel in November 2002   totaling approximately NIS 25 million (Sonol’s share amounts to approximately   NIS 4.6 million) on account of damages incurred  as a result of negligent maintenance of inventories  of crude oil, the State of Israel in March   2004 submitted a claim against Sonol, Paz, Delek and Dor Energy and against   the Oil Refineries and the Oil Infrastructures and Energy Ltd., contending   that over the years they collected storage fees and insurance for the   Emergency fuel inventories of the State of Israel.  According to the State it became clear retroactively that a   considerable part of the inventories was not usable, having turned into   sludge, due to the negligence of the Refineries, the Oil Infrastructure and   Energy Ltd. and the other fuel companies noted above. Sonol’s share is   approximately NIS 21 million.  The   fuel companies reject the States contentions outright.            e.  In March 2004 a financial claim was filed against   Supergas by a supplier, in the amount of NIS 5 million.  The supplier contends that it carried out   various projects for Supergas in the field of computerization, consulting and   information systems, but Supergas did not pay all the amounts due for these   projects.  Supergas’ management   rejects the contentions in the claim outright.   NOTE 32 –  Financial statements translated into U.S. dollars       The financial records of the Company and its   consolidated companies are maintained on a current basis in historical   nominal New Israel Shekels and U.S. dollars.               The translated consolidated financial statements,   stated in U.S. dollars, have been prepared in accordance with generally   accepted accounting principles for use in connection with the preparation of   the financial statements of a U.S. shareholder.               The functional currency of the Company is the U.S.   dollar. The consolidated financial statements in U.S. dollars are prepared in   accordance with translation principles identical to those prescribed by   Statement of Financial Accounting Standards No. 52 (“F.A.S.B. 52”), based on   the historical nominal amounts.               The financial statements of subsidiaries, whose   functional currency is NIS., were translated into U.S. dollars according to   the exchange rate in effect on the balance sheet date. Differences arising   from the Company’s investment in its subsidiaries based on the U.S. dollars,   and the Company’s share in the equity of these subsidiaries, translated to   U.S. dollars at the current exchange rate, are included in “Accumulated   foreign currency translation adjustments” in shareholders’ equity. Exchange   rate differences arising from loans taken in NIS. for the financing of   investments in subsidiaries, have also been included in that component of   shareholders’ equity.   -71-    Granite Hacarmel Investments Limited and its Subsidiaries     Notes to the Financial Statements   as at December 31, 2003         NOTE 32 –  Financial statements translated into U.S. dollars       CONSOLIDATED BALANCE SHEETS   (In thousands)                                       Translated to U.S. Dollars                                  December 31,                                  2003      2002                                  Current   assets                          Cash   and cash equivalents     1,707     7,153  *          Marketable   securities     669     3,716             Trade   receivables     220,511     217,771  *          Other   receivables     16,489     28,817  *          Receivables   for work       in progress     3,298     3,672             Inventories     44,559     46,055             Affiliated   company designated for sale     1,817     -                                       289,050     307,184                                                        Non-current inventories     25,344     25,344                                                        Investments, long-term loans and           receivables                         Affiliated   companies        and other investments     25,531     32,286  *          Long-term   loans     29,647     27,988  *          Deferred   taxes, net     12,041     3,627                                       67,219     63,901                                                        Fixed assets, net     251,001     246,240                                                        Other assets     36,992     30,513  *                                                           669,606     673,182                             *Reclassified -72-    Granite Hacarmel Investments Limited and its Subsidiaries     Notes to the Financial Statements   as at December 31, 2003        NOTE 32 –  Financial statements translated into U.S. dollars (continued)       CONSOLIDATED   BALANCE SHEETS   (In thousands)                                      Translated to U.S. Dollars                                 December   31,                                 2003     2002                                  Current liabilities                      Credit from banks and others     301,990     242,237          Trade payables     43,134     39,875  *       Other payables     44,656     38,464                                       389,780     320,576                                                        Long-term liabilities                      Long-term loans     164,436     198,807  *       Customers’ deposits     13,267     13,136          Liabilities for severance pay, net     5,214     6,210          Deferred taxes     16,154     14,614                                       199,071     232,767                                                        Minority interest     1,888     1,740                                                        Shareholders’ equity                      Ordinary shares, NIS 1 par value                      Authorized 225,000,000 shares                      Issued and outstanding 139,336,000 shares   as of  December 31, 2003 and 2002     59,696     59,696          Capital reserves     65,042     65,042          Company’s shares held by a consolidated   Company     (2,106  )  (2,106  )       Retained earnings     (41,890  )  (3,189  )       Accumulated other comprehensive income     (766  )  (1,109  )       Cumulative foreign currency translation   Adjustment     (1,109  )  (235  )                              Total shareholders’ equity     78,867     118,099                                                              669,606     673,182                             *Reclassified -73-    Granite Hacarmel Investments Limited and its Subsidiaries     Notes to the Financial Statements   as at December 31, 2003        NOTE 32 –  Financial statements translated into U.S. dollars (continued)       CONSOLIDATED   STATEMENT OF INCOME   (In thousands except per share data)                                      Translated   to U.S. Dollars                                 Year ended   December 31,                                 2003     2002     2001                                                                     Sales     934,795     902,737     906,300          Less: Government imposts     302,170     291,354     301,286                                                                    Net sales     632,625     611,383     605,014          Cost of sales     464,649     450,659     461,856                                       Gross profit     167,976     160,724     143,158                                                                    Selling, general and    administrative expenses     122,648     105,883  *  88,816  *       Depreciation and amortization     20,829     20,432     18,653                                             143,477     126,315     107,469                                                                    Income from operations     24,499     34,409     35,689                                                                    Financing expenses, net     (35,570  )  (19,892  )  (9,074  )       Other (expenses) income, net     (10,077  )  (9,844  )  2,011                                             (45,647  )  (29,736  )  (7,063  )                                                                 (Loss) income before taxes on   income     (21,148  )  4,673     28,626          Taxes on income     3,239     (4,292  )*  (6506  )*                                                                 (Loss) income after taxes on   income     (17,909  )  381     22,120                                        Company’s share in results of   affiliated companies, net     (3,896  )  (995  )  2,687                                        Minority interest in the results of     Subsidiaries     (274  )  (545  )  (476  )                                                                  Net (loss) income for the year     (22,079  )  (1,159  )  24,331                                                                    Net (loss) earnings per ordinary   share (in U.S. dollars):                                                          Primary and diluted (loss) income     (0.16  )  (0.01  )  0.18                                        *Reclassified -74-    Granite Hacarmel Investments Limited and its Subsidiaries     Notes to the Financial Statements   as at December 31, 2003        NOTE 32 –  Financial statements translated into U.S. dollars (continued) CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands)    Translated to U.S. Dollars                  Common   Stock     Capital   reserves     Company’s   Shares held   by a   consolidated   company     Retained   earnings     Accumulated   other   comprehensive   income *     Cumulative   foreign   currency   translation   adjustment     Total                                                                                                           Balance as at January 1,   2001     59,696     65,042        (810  )     1,573        865           -        126,366       Changes in 2001:                                                                     Net income for   the year     -     -        -        24,331        -           -        24,331         Divided paid     -     -        -        (27,934  )     -           -        (27,934  )      Acquisition of   the Company’s       shares by a subsidiary     -     -        (62  )     -        -           -        (62  )      Reclassification   adjustment for       gains included in net income     -     -        -        -        (353  )        -        (353  )                                                                                                                                            Balance as at December 31,   2001     59,696     65,042        (872  )     (2,030  )     512           -        122,348        Changes in 2002:                                                                     Net loss for the   year     -     -        -        (1,159  )     -           -        (1,159  )      Acquisition of   the Company’s       shares by a subsidiary     -     -        (1,234  )     -        -           -        (1,234  )     Unrealized losses on   securities     -     -        -        -        (1,198  )        -        (1,198  )      Foreign currency   translation       adjustment     -     -        -        -        -           (235  )     (235  )      Reclassification   adjustment for       gains included in net income     -     -        -        -        (423  )        -        (423  )                                                                                                                                             Balance as December   31, 2002     59,696     65,042        (2,106  )     (3,189  )     (1,109  )        (235  )     118,099         Changes in 2002:                                                                     Net loss for the   year     -     -        -        (22,079  )     -           -        (22,079  )      Dividend paid     -     -        -        (16,622  )     -           -        (16,622  )     Unrealized losses on   securities     -     -        -        -        263                    263           Foreign   currency translation       adjustment     -     -        -        -        -           (874  )     (874  )      Reclassification   adjustment for       gains included in net income     -     -        -        -        80           -        80                                                                                                                                                Balance as December   31, 2003     59,696     65,042        (2,106  )     (41,890  )     (766  )        (1,109  )     78,867                                                                          *     Deriving from unrealized gains (losses) on marketable securities, net of tax effect. -75-    Granite Hacarmel Investments Limited and its Subsidiaries     Notes to the Financial Statements   as at December 31, 2003        Note 32 –  Financial statements translated into U.S. dollars (continued)       The material differences between Israeli GAAP and   U.S. GAAP as applicable to the financial statements are:               a)  Deferred taxes in respect of   differences in measuring non-monetary items:          Deferred taxes in respect of differences in the   measuring of non-monetary items (mainly fixed assets and inventories) for   accounting purposes (U.S. dollar) and for tax purposes (Adjusted NIS).                     In accordance with Israeli GAAP:          Companies record deferred taxes in respect of all   such differences.                     In accordance with U.S. GAAP:          According to paragraph 9(f) of FAS No. 109, deferred   taxes should not be provided in respect of such differences.                  b)  Marketable securities                     In accordance with Israeli GAAP:          Israeli GAAP divides marketable securities into two   categories:          Marketable securities that constitute a “current   investment” are stated at market value.           Marketable securities, that constitute a “permanent   investment” are stated at cost (and in respect to debentures – include   accumulated interest), except where their market value is lower, and the   decline in value is not considered to be temporary. Changes in value are   charged to the statement of income. See also note 2F above.                     In accordance with U.S. GAAP:                     FAS No. 115 divides marketable securities into three   categories:                     (1)  Marketable securities that are acquired and held   principally for the purpose of selling them in the near future, are   classified as “trading securities” and are reported at their fair value.   Unrealized gains and losses are included in the statement of income.                        (2)  Debt securities that the company intends hold to   maturity are classified as “held-to-maturity” securities are reported at   their amortized cost.   -76-    Granite Hacarmel Investments Limited and its Subsidiaries    Notes to the Financial Statements   as at December 31, 2003         NOTE 32 –  Financial statements translated Into U.S. dollars (continued)          (3)   Marketable securities, not  classified as either “held-to-maturity” securities or “trading   securities”, are classified as “available-for-sale” securities and are   reported at their fair value. Unrealized gains and losses are included in a   separate item within the shareholders equity, and reported as other   comprehensive income.                     c)  Amortization of goodwill                     In accordance with Israeli GAAP:                     Under Israeli GAAP goodwill is amortized over the   estimated benefit period, but usually no longer than 10 years.                     In accordance with U.S. GAAP:                     Under US GAAP, commencing January 1, 2002, goodwill   is no longer amortized but is reviewed annually (or more frequently if   impairment indicators arise) for impairment.                     Goodwill represents the   excess of costs over fair value of assets of businesses acquired. The Company   adopted the provisions of SFAS No. 142, Goodwill and Other Intangible   Assets, as of January 1, 2002. Goodwill and intangible assets acquired   in a purchase business combination and determined to have an indefinite   useful life are not amortized, but instead tested for impairment at least   annually in accordance with the provisions of SFAS No. 142.   SFAS No. 142 also requires that intangible assets with estimable useful   lives be amortized over their respective estimated useful lives to their   estimated residual values, and reviewed for impairment in accordance with   SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived   Assets.                     In connection with SFAS   No. 142’s transitional goodwill impairment evaluation, the Statement   required the Company to perform an assessment of whether there was an   indication that goodwill is impaired as of the date of adoption. The implied   fair value of this reporting unit exceeded its carrying amount and the   Company was not required to recognize an impairment loss.                     Prior to the adoption of   SFAS No. 142, goodwill was amortized on a straight-line basis over the   expected periods to be benefited, generally 10 years, and assessed for   recoverability by determining whether the amortization of the goodwill   balance over its remaining life could be recovered through undiscounted   future operating cash flows of the acquired operation.                  d)  Impairment of Assets                     In accordance with Israeli GAAP:                     The   Company applied Standard No. 15 under which the Company needs to test the   recoverable amount of the assets, which is the higher of the net sales price   and usage value.  A loss from   impairment will be reversed only if changes have occurred in the estimates   used in determining the recoverable value of the asset, from the date of   which the last impairment was recognized.   -77-    Granite Hacarmel Investments Limited and its Subsidiaries    Notes to the Financial Statements   as at December 31, 2003         NOTE 32 –  Financial statements translated Into U.S. dollars (continued)             In accordance with US GAAP:                            The   Company applied FAS 144 with respect to long-lived assets and APB 18 with   respect to equity method investees.              Under   FAS 144 an impairment of long-lived asset is recorded only if the   undiscounted cash flows of the related asset does not cover its book value.                           Under   APB 18 a loss is recorded only when the impairment investees is other than   temporary.             Both   under FAS 144 and under APB 18 reversals of impairments are not allowed,   unless the assets are held for sales.                     e)  Other disclosures          Government imposts –   consist of excise taxes imposed on fuel products mainly gasoline and gasoil.   -78-     Granite Hacarmel Investments Limited and its Subsidiaries     Notes to the Financial Statements   as at December 31, 2003         LIST OF MAIN INVESTEE COMPANIES    List   of the main subsidiaries and affiliates      Holdings and   Control as of   December 31,2003                            %                         Consolidated Subsidiaries:                 Sonol Israel Ltd.      100             Sprint Motors Ltd.     100                                 Milchen Sonol Agency Ltd.     66.67             Sonol J-M Ltd.     70             Sonol Dan (1992) Ltd.     100             Sonol Darom Ltd.     100             Sonol Cnaan Ltd     51             Sonol Shani Agencies Ltd.     51             Sprint Motors Transport (1999) Ltd.     100             Kleesson Holdings (1999) Ltd.     100             Sonor Ltd.     100             After Holdings Ltd.     100             Granita Holdings Ltd.     75             Granite-Sonol Oil and Gas Drilling-Limited   Partnership     100             Tambour Ltd.     100             Tambour Ecology Ltd.     100             Tambourechev Paints1997 Ltd.     100             Safety Kleen (Israel) Ltd.     100             Tzach Serafon Ltd.     100             Serafon Trading 1997 Ltd.     100             Tambour Distribution Ltd.     100             Texma Chemicals Ltd.     100             Supergas Israel Gas Distribution Company Ltd.     100             Supergas Hanegev Ltd.     65             Supergas Rehovot (1989) Ltd.     100             M. Solomon & Co. Gas Agencies Ashkelon Ltd.     51             Supergas Hagalil Ltd.     100             Rav Gas Ltd.     55             Allied Oils and Chemicals Ltd.     100             Sonefco Bank Street Corporation     100             Granite Hacarmel Holdings (1993) Ltd.     100             Granite Hacarmel Properties (1993) Ltd.     100             Granite Hacarmel Holdings and Development Ltd     100             Granite Hacarmel Industries Ltd.     100             Granite Hacarmel Y.A. Holdings Ltd.     100             Granite Hacarmel NZV Holdings Ltd.     100             Granite Hacarmel Energy (1997) Ltd.     100             Granite Hacarmel Tourism Ltd.     100             Otzem Promotion and Investments (1991) Ltd.     100         -79-    Granite Hacarmel Investments Limited and its Subsidiaries     Notes to the Financial Statements   as at December 31, 2003             List   of the main subsidiaries and affiliates (cont.)     Holdings and   Control as of   December 31, 2003                           %                                      Affiliated Companies                                 Aero Echo Ltd.     33.33             International Ilios     43             Via Maris – Joint Venture     24             Via Maris Desalinization Ltd.     26.5             Tambour – Hefer     Ecology – Partnership     50             Yarok Az Ltd.     22.9             Nitzba Holdings 1995 Ltd.     9.82             Orpak Industries (1983)Ltd.     10.1             Park Mini Israel – Limited Partnership     35             L.D.I.-Leasing Dynamics International Ltd.     25.1             Green Anchors Ltd.     50                                 The above list does not include inactive and/or   immaterial affiliated companies and others               -80-      OPHIR HOLDINGS LTD. (An Israeli Corporation) 2005 ANNUAL REPORT        OPHIR HOLDINGS LTD. 2005 ANNUAL REPORT TABLE OF CONTENTS                          Page     REPORT OF INDEPENDENT AUDITORS       2     CONSOLIDATED FINANCIAL STATEMENTS:             Balance sheets       3-4     Statements of income (loss)       5     Statements of changes in shareholders’   equity       6     Statements of cash flows       7-8     Notes to financial statements       9-32        REPORT OF INDEPENDENT AUDITORS To the shareholders of OPHIR HOLDINGS LTD.  We have audited the consolidated financial statements of Ophir Holdings Ltd. and its subsidiaries (the “Company”): balance sheets as of December 31, 2005 and 2004 and the related statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Boards (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2005 and 2004 and the consolidated results of operations and cash flows of the Company for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. As explained in note 1b, the financial statements, as of dates and for reporting periods subsequent to December 31, 2003, are presented in New Israeli Shekels, in conformity with accounting standards issued by the Israel Accounting Standards Board. The financial statements as of dates and for reporting periods ended prior to, or on the above date, are presented in values that have been adjusted for the changes in the general purchasing power of the Israeli currency, through that date, in accordance with pronouncements of the Institute of Certified Public Accountants in Israel. Accounting principles generally accepted in Israel vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 14 to the consolidated financial statements.                  Tel-Aviv, Israel   Kesselman & Kesselman         March 27, 2006   Certified Public Accountants (Isr.)        2    OPHIR HOLDINGS LTD. CONSOLIDATED BALANCE SHEETS                                                                      December 31                                                  Note       2005       2004                                                                NIS in thousands   (see note 1b)                                            A s s e t s                                             CURRENT ASSETS :           12                                 Cash and cash equivalents           1k           2,396           2,894         Short term investments           4a           25,018           86,935         Accounts receivable:           13a                                 Realated parties                       54,952           151         Other                       11,062           4,853                                                   T o t a l  current assets                       93,428           94,833                                                   LAND - BUSINESS INVENTORY           1e;8(2)           13,048           13,048                                                   INVESTMENTS:                                             Associated companies           3           157,248           187,275         Other companies           4;8           1,387           72,854         Loan to related party           11b           8,306           8,114                                                                           166,941           268,243                                                                                                 FIXED ASSETS, net of   accumulated depreciation           5                       57,425                                                                           273,417           433,549                                                                        (                          (   Avi Israel     DIRECTORS   (             (                          (   Giora Bar-Nir    Date of approval of the financial statements: March 27, 2006 3                                                                         December 31                                                  Note       2005       2004                                                                NIS in thousands   (see note 1b)                                                                                    Liabilities and shareholders’ equity                                             CURRENT LIABILITIES:           12                                 Bank credit and loans (mainly current   maturities)           13b           3,834           8,383         Accounts payable and accruals           13c           4,245           4,121                                                   T o t a l  current liabilities                       8,079           12,504                                                   LONG-TERM LIABILITIES:           12                                 Bank loans (net of current maturities)           6           22,552           58,675         Capital notes to an associated company           7           151,601           151,601         Capital note to related party           7           1,069           1,069         Payables in respect of acquisition of land   - business inventory           8(2)           11,894           11,843         Deferred income taxes           10b                       2,550                                                   T o t a l  long-term liabilities                       187,116           225,738                                                   T o t a l  liabilities                       195,195           238,242                                                       COMMITMENTS           8                                 MINORITY INTEREST                       25           25         SHAREHOLDERS’ EQUITY           9           78,197           195,282                                                                           273,417           433,549                                                  The accompanying notes are an integral part of the consolidated financial statements. 4    OPHIR HOLDINGS LTD. CONSOLIDATED STATEMENTS OF INCOME (LOSS)                                                                          Note       2005       2004       2003                                                                       NIS in   thousands (see note 1b)                                      REVENUES AND GAINS:                                                         From lease of buildings                       3,649           6,737           10,278         Share in profits (losses) of associated   companies - net           3           651           (1,150   )       (2,071   )     Gain from sale and increase in value of   marketable securities- net                       1,815           2,183           164         Dividend received from other companies                       79           11,623           7,896         Management fees from associated company and   others           11a                       433           438         Others                       240           2,141           120                                                                                     6,434           21,967           16,825                                                             EXPENSES AND LOSSES:                                                         Operating cost of leased buildings   (including depreciation)                       1,909           2,703           3,613         Impairment of investments in associated   companies and other companies           3;4           4,571           950                     General and administrative expenses - net           11a           2,314           1,480           4,623         Loss from sale of investments in associated   companies                       1,618                                 Loss (gain) from sale of real estate                       7,519           (535   )       30         Financial expenses (income) - net           11a;13f           (183   )       700           1,532         Others                       106                                                                                                             17,854           5,298           9,798                                                             INCOME (LOSS) BEFORE TAXES ON INCOME                       (11,420   )       16,669           7,027         TAXES ON INCOME (TAX SAVING)           10c           (5,255   )       2,374           4,731                                                             INCOME (LOSS) AFTER TAXES ON INCOME(TAX   SAVING)                       (6,165   )       14,295           2,296         MINORITY INTEREST SHARE IN LOSSES OF A   SUBSIDIARY                                   1           15                                                             NET INCOME (LOSS) FOR THE YEAR                       (6,165   )       14,296           2,311                                                            The accompanying notes are an integral part of the consolidated financial statements. 5    OPHIR HOLDINGS LTD. STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY                                                                                  Share   capital       Capital   surplus       Dividend   Declared   Subsequent   to balance   sheet   Date       Retained   earnings       Total                                                              NIS in thousands (see note 1b)                                                                                                BALANCE AT JANUARY 1, 2003           2,832           80,488                       139,375           222,695         CHANGES DURING 2003:                                                                     Net income                                               2,311           2,311         Dividend paid                                               (14,000   )       (14,000   )     Erosion of capital note                       (20   )                               (20   )                                                                 BALANCE AT DECEMBER 31, 2003           2,832           80,468                       127,686           210,986         CHANGES DURING 2004:                                                                     Net income                                               14,296           14,296         Dividend paid                                               (30,000   )       (30,000   )     Appropriation for distribution of dividend   subsequent to balance sheet date                                   90,830           (90,830   )                                                                             BALANCE AT DECEMBER 31, 2004           2,832           80,468           90,830           21,152           195,282         CHANGES DURING 2005:                                                                     Net loss                                               (6,165   )       (6,165   )     Dividend paid (In kind and in cash)                       (5,103   )       (90,830   )       (14,987   )       (110,920   )     Appropriation for distribution of dividend   subsequent to balance sheet date                       (55,000   )       55,000                                                                                             BALANCE AT DECEMBER 31, 2005           2,832           20,365           55,000           -,-           78,197                                                                    The accompanying notes are an integral part of the consolidated financial statements. 6    (Continued) - 1 OPHIR HOLDINGS LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS                                                          2005       2004       2003                                                NIS in   thousands (see note 1b)                                CASH FLOWS FROM OPERATING ACTIVITIES:                                             Net income (loss) for the year           (6,165   )       14,296           2,311         Adjustments to reconcile net income (loss)   to net cash flows provided by operating activities*           8,820           (3,032   )       3,703                                                 Net cash provided by operating activities           2,655           11,264           6,014                                                 CASH FLOWS FROM INVESTING ACTIVITIES:                                             Proceeds from sale of investments in other   companies and trading securities           74,923           21,242                     Proceed from sale of Associated Company           32,564                                 Proceed from sale of leased buildings, net           42,397           7,847           30,190         Investment in associated companies   (including capital notes and loans - net)           (746   )       (499   )       (424   )     Investments in other companies           (496   )       (549   )       (301   )     Purchase of short term investments, net           (24,707   )       (196   )                 Other                       1,935           (72   )                                             Net cash provided by investing activities           123,935           29,780           29,393                                                 CASH FLOWS FROM FINANCING ACTIVITIES:                                             Repayment of long-term bank loans- net           (42,172   )       (8,382   )       (8,307   )     Related parties           (55,000   )                             Dividend paid           (29,990   )       (32,953   )       (11,047   )     Short-term bank credit and loans - net           74           (30   )       (13,254   )                                             Net cash used in financing activities           (127,088   )       (41,365   )       (32,608   )                                             INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS           (498   )       (321   )       2,799         BALANCE OF CASH AND CASH EQUIVALENTS AT   BEGINNING OF YEAR           2,894           3,215           416                                                 BALANCE OF CASH AND CASH EQUIVALENTS AT END   OF YEAR           2,396           2,894           3,215                                                7    (Concluded) - 2 OPHIR HOLDINGS LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS                                                          2005       2004       2003                                                NIS in   thousands (see note 1b)                                * Adjustments to reconcile net income   (loss) to net cash flows provided by operating activities:                                             Income and expenses not involving cash   flows:                                             Share in losses (profits) of associated   companies - net           (651   )       1,150           2,071         Depreciation           729           1,459           1,953         Deferred income taxes - net           (2,550   )       (126   )       2,971         Minority interest in losses of a subsidiary                       (1   )       15         Loss (gain) from sale of fixed assets - net           7,519           (535   )       (90   )     Gain from sale and increase in value of marketable   securities - net           (1,815   )       (2,183   )       (164   )     Loss from sale of associated companies           1,618                                 Gain from sale of investment in other   company                       (305   )                 Impairment (reversal of impairment) of   investment in associated companies and others - net           4,571           (873   )                 Linkage differences (erosion) on long-term   bank loans- net           1,426           676           (67   )     Linkage differences and interest on loans   to associated companies and others           (1,770   )       (1,604   )       (1,497   )                                                         9,077           (2,342   )       5,192                                                 Changes in operating asset and liability   items:                                             Decrease (increase) in accounts receivable           1,370           (369   )       1,677         Decrease in accounts payable and accruals           (1,627   )       (321   )       (3,166   )                                                         (257   )       (690   )       (1,489   )                                                         8,820           (3,032   )       3,703                                                Supplementary information on investing and financing activities not involving cash flows:               a.   As resolved by the board of directors on   February 9, 2005, the Company distributed the remaining shares in Industrial   Buildings to its shareholders, as a quasi-dividend in the amount of   NIS 80,930 thousands.                b.   The balance of receivables includes an   amount of NIS 6,780 thousands, which is deposited in a trust account, in   respect of the sale of a building. This balance was not reflected within the   framework of investing activities in the statement of cash flows.                c.   The balance of receivables includes an   amount of NIS 3,500 thousands, in respect of the sale of buildings for   rent, which were sold during 2003. This balance was not reflected in the   statements of cash flows in 2003, and will be included at the time of its   settlement.     The accompanying notes are an integral part of the consolidated financial statements. 8    OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                      NOTE 1   –   SIGNIFICANT ACCOUNTING POLICIES                   The   significant accounting policies, applied on a consistent basis, are as   follows:                           a.   General:                               1)   Ophir   Holdings Ltd. (“the Company”) is a holding and investment company.                        The   subsidiary Merkazim Investments Ltd. is engaged in the renting of commercial   buildings. In 2003, this company sold all its holdings in the commercial   buildings that were designated for rent.                                    The   subsidiary, New Horizons (1993) Ltd., holds a number of real estates   (designated for sale), which were purchased from a related party, see also   note 8(2).                                   As to the   activities of the associated companies, see note 3c.                               2)   Definitions:                                      Subsidiary -       a company   controlled or owned to the extent of over 50%, the financial statements of   which have been consolidated with the financial statements of the Company.                                   Associated   company -       a company   controlled to the extent of 20% or over (which is not a subsidiary), or a   company less than 20% controlled which complies with the condition relating   to “significant influence”, as prescribed by Opinion 68 of the Institute of   Certified Public Accountants in Israel (the “Israeli Institute”), the   investment in which is presented by the equity method.                                   Other   company -       a company to   which the conditions specified in the preceding paragraphs do not apply.                                   The Group -       the Company,   its subsidiaries and its associated companies.                                   Related   parties -       as defined   in Opinion 29 of the Israeli Institute.                               3)   Principles   of accounting                           The   consolidated financial statements have been prepared in accordance with   accounting principles generally accepted in Israel (Israeli GAAP). Israeli   GAAP vary in certain significant respects from accounting principles   generally accepted in the United States of America. Information relating to   the nature and effect of such differences is presented in note 14.    9    OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)                      NOTE 1   –   SIGNIFICANT ACCOUNTING POLICIES (continued):                           b.   Financial statements presentation basis:                               The Company   draws up and presents its financial statements in Israeli currency (“shekels”   or “NIS”).                                1)   Transition   to nominal financial reporting in 2004                                   With effect   from January 1, 2004, the Company has adopted the provisions of Israel   Accounting Standard No. 12 - “Discontinuance of Adjusting Financial   Statements for Inflation” - of the Israel Accounting Standards Board (the   “IASB”) and, pursuant thereto, the Company has discontinued, from the   aforesaid date, the adjustment of its financial statements for the effects of   inflation in Israel.                                   The amounts   adjusted for the effects of inflation in Israel (see 2 below), presented in   the financial statements as of December 31, 2003 (“the transition   date”), were used as the opening balances for the nominal financial reporting   in the following periods. Additions made after the transition date have been   included in the financial statements at their nominal values.                                   Accordingly,   the amounts reported in 2005 and 2004 are composed as follows: amounts   originating from the period that preceded the transition date are composed of   their adjusted to December 2003 shekel amount, with the addition of amounts   in nominal values that were added after the transition date, and net of   amounts that were deducted after the transition date (the retirement of such   sums is effected at their adjusted values as of transition date, their   nominal values, or a combination of the two, according to the circumstances).   All the amounts originating from the period after the transition date are   included in the financial statements at their nominal values.                               2)   Comparative   figures - amounts adjusted to end of 2004 shekels                                   Through   December 31, 2003, the Company prepared its financial statements on the   basis of historical cost adjusted for the changes in the general purchasing   power of Israeli currency (NIS), based upon changes in the consumer price   index (“the CPI”), in accordance with pronouncements of the Israeli   Institute. The comparative figures included in these financial statements are   based on the amounts included for the prior reporting periods, as adjusted   for the changes in the general purchasing power of the Israeli currency,   based on the CPI for December 2003 (the CPI in effect at the transition   date).                                   The   components of the income statements were, for the most part, adjusted as   follows: the components relating to transactions carried out during the   reported period - revenues, expenses, etc. - were adjusted on the basis of   the index for the month in which the transaction was carried out, while those   relating to non-monetary balance sheet items (mainly - depreciation) were   adjusted on the same basis as the related balance sheet item. The financing   component represents financial income and expenses in real terms and the   erosion of balances of monetary items during the year.     10    OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)                          NOTE 1   –   SIGNIFICANT ACCOUNTING POLICIES (continued):                                   3)   The amounts   of non-monetary assets do not necessarily represent realization value or   current economic value, but only the reported amounts of such assets, as   described in (1) above. In these financial statements, the term “cost”   signifies cost in reported amounts.                           c.   Principles of consolidation:                           1)   The   consolidated financial statements include the accounts of the Company and its   subsidiaries. The companies included in consolidation are listed in   note 2.                               2)   Intercompany   balances and transactions have been eliminated.                           d.   Short term investments - marketable securities                           These   securities (except for investment in shares constituting “permanent   investment”, see f(2) below), are stated at market value.                           The changes   in value of the above securities are carried to income.                       e.   Land - business inventory                           The land is   presented at cost, which - in managements’ estimation - is lower than market   value.                           According to   the agreements for the purchase of land, the Company might pay additional   costs of up to 90% of the net sale proceeds, see also note 8(2).                       f.   Investments:                                   1)   Associated   companies:                                   (a)   The   investments in these companies are accounted for by the equity method. The   company reviews – at each balance sheet date - whether any events have   occurred or changes in circumstances have taken place, which might indicate   that there has been an impairment of its investment in associated companies.   The balance of the investment as of December 31, 2005 is presented net   of a provision for the impairment in value of an associated company, see j. below   and note 3.                                        (b)   The excess   of cost of the investment in associated companies over the Company’s share in   their equity in net assets at date of acquisition (“excess of cost of   investment”) represents the amount attributed to land and buildings. The   amount attributed to buildings is amortized in equal annual installments of   4% per year.    11    OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)                      NOTE 1   –   SIGNIFICANT ACCOUNTING POLICIES (continued):                               2)   Other   companies                                   The   investments in the shares of these companies, including investments in quoted   shares, which the Company intends to hold for a long period (“permanent   investment”), are stated at cost, net of impairment for decrease in value,   which is not of a temporary nature.                           g.   Fixed assets:                            1)   These assets   are stated at cost.                               3)   Cost of   fixed assets includes the Company’s share in a joint venture engaged solely   in construction of a building and rental thereof.                                   During the   reported year the Company realized the building for rent - see also note 5.                               3)   Financial   expenses in respect of loans and credit applied to finance the construction   or acquisition of buildings - incurred until construction was completed - were   charged to cost of the buildings.                               4)   The assets   are depreciated by the straight-line method, on basis of their estimated   useful life. Annual rates of depreciation are 2% or 4%.                           h.   Deferred income taxes:                           1)   Deferred   taxes are computed in respect of differences between the amounts presented in   these statements and those taken into account for tax purposes. As to the   factors in respect of which deferred taxes have been included - see   note 10b.                                   Deferred tax   balances are computed at the tax rate expected to be in effect at time of   release to income from the deferred tax accounts. The amount of deferred   taxes presented in the income statement reflects changes in the above   balances during the year.                               2)   Taxes which   would apply in the event of disposal of investments in subsidiaries and   associated companies have not been taken into account in computing the   deferred taxes, since as of the date of approval of these financial   statements it is the Company’s policy to hold these investments, not to   realize them.                           i.   Revenue recognition                           Income from   leasing of buildings is recognized on the accrual basis, in accordance with   the terms of the agreements with tenants.    12    OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)                  NOTE 1   –   SIGNIFICANT ACCOUNTING POLICIES (continued):                       j.   Impairment of assets:                           The company reviews - at each balance sheet date - whether any events   have occurred or changes in circumstances have taken place, which might   indicate that there has been an impairment of fixed assets and identifiable   intangibles, including goodwill. When such indicators of impairment are   present, the company evaluates whether the carrying value of the asset in the   company’s accounts can be recovered from the cash flows anticipated from that   asset, and, if necessary, records an impairment provision up to the amount   needed to adjust the carrying amount to the recoverable amount.                            The recoverable value of an asset is determined according to the   higher of the net selling price of the asset or its value in use to the   company. The value in use is determined according to the present value of   anticipated cash flows from the continued use of the asset, including those   expected at the time of its future retirement and disposal.                            During 2005   the Company recorded an impairment charge on its investment in other company   of NIS 4,571 thousand see also note 4b                           In 2004 the   Company recorded an impairment charge on its investment in Lysh of NIS 950   thousand see also note 3c(3).                           The   impairment loss is carried directly to income. Where indicators are present   that beneficial events have occurred or beneficial changes in circumstances   have taken place, the impairment provision in respect of the asset (other   than goodwill) may be cancelled or reduced in the future, so long as the   recoverable value of the asset has increased, as a result of changes in the   estimates previously employed in determining such value.                       k.   Cash equivalents                           The Group   considers all highly liquid investments, which include short-term bank   deposits (up to three months from date of deposit) that are not   restricted as to withdrawal or use, to be cash equivalents.                       l.   Loss per NIS 1 of par value of shares                           The   financial statements do not include data regarding loss per NIS 1 of par   value of shares, since the data would not provide significant additional   information to that otherwise provided by the financial statements.                       m.   Format of income statements                           In view of   the nature of the Company’s activities - holding of companies which operate   in different fields - the Company is of the opinion that concentrated   presentation of all revenue and gain items as a group, and of all expense and   loss items in a separate group is more suitable to reflect its activities.    13    OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)                  NOTE 1   –   SIGNIFICANT ACCOUNTING POLICIES (continued):                   n.   Linkage basis                           Balances the   linkage arrangements in respect of which stipulate linkage to the last index   published prior to date of payment are stated on the basis of the last index   published prior to the latest balance sheet date (the index for November).                       o.   Use of estimates in the preparation of financial statements                           The   preparation of financial statements in conformity with generally accepted   accounting principles requires management to make estimates and assumptions   that affect the reported amounts of assets and liabilities and disclosure of   contingent assets and liabilities at the dates of the financial statements   and the reported amounts of revenues and expenses during the reporting years.   Actual results could differ from those estimates.                       p.   Dividend declared subsequent to balance sheet date                            Liabilities   relating to dividends declared subsequent to balance sheet date are included   in the accounts for the period in which the declaration was made. The amount   declared is appropriated, however, from retained earnings, and reported as a   separate item in the shareholders’ equity - “Dividend declared subsequent to   balance sheet date”.                       q.   Recently issued accounting pronouncements in Israel:                                  1.   In August 2005, the Israel Accounting Standards Board issued Israel   Accounting Standard No. 22 - “Financial Instruments: Disclosure and   Presentation”, which is based on International Accounting Standard No. 32.   This standard prescribes the rules for the presentation of financial   instruments and the proper disclosure required therefore. The standard sets   forth the rules for classifying financial instruments, the rules for   splitting and classifying compound financial instruments and the rules for   offsetting financial assets and financial liabilities. The standard also prescribes   the rules for classifying interest, dividends, losses and gains relating to   financial instruments.                                This   accounting standard applies to financial statements for periods commencing on   or after January 1, 2006. The standard is to be applied prospectively and,   accordingly, comparative data that are presented in the financial statements   for periods commencing from the effective date of the standard will not be   re-presented. Financial instruments issued before the standard’s effective   date are to be classified and presented in conformity with the provisions of   the standard from its effective date. Compound financial instruments (that   include both an equity component and a liability component), which were   issued in periods prior to the standard’s effective date, and which had not   yet been converted or redeemed at that date, are to be classified according   to their component parts and are to be presented in conformity with the   provisions of the standard, commencing from the effective date of the standard.                                  When the   standard becomes effective, Opinion 48 - “Accounting Treatment of Option   Warrants”, and Opinion 53 - “Accounting Treatment of Convertible Liabilities”   will be revoked.                               In the   Company’s opinion, implementation of this standard is not expected to have a   material effect on its financial statements in future periods.     14    OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)                      NOTE 1   –   SIGNIFICANT ACCOUNTING POLICIES (continued):                       2.   In Febuary   2006, the IASB issued Israel Accounting Standard No. 25 - “Revenue”, which is   based on International Accounting Standard No. 18. This standard   prescribes recognition, measurement, presentation and disclosure criteria for   revenues originating from the sale of goods purchased or manufactured by the   company, the provision of services, as well as revenues deriving from the use   of the company’s assets by others (interest income, royalties or dividends).                                The   principal issue in accounting for revenue is determining the timing of   revenue recognition. Revenue from the sale of goods shall be recognized when   all the following conditions have been satisfied: (a) the significant risks   and rewards of ownership of the goods have been transferred to the buyer; (b)   the company retains neither continuing managerial involvement to the degree   usually associated with ownership nor effective control over the goods sold;   (c) the amount of revenue can be measured reliably; (d) it is probable that   the economic benefits associated with the transaction will flow to the   company; and (e) the costs incurred or to be incurred in respect of the   transaction can be measured reliably.                               Revenue from   the provision of services shall be recognized by reference to the stage of   completion of the transaction at the balance sheet date, subject to the   satisfaction of conditions (c) through (e) above, and only when the stage of   completion of the transaction at the balance sheet date can be measured   reliably.                                A   clarification of said standard was issued by the IASB in Febuary 2006:   Clarification No. 8 - “Reporting of Revenue on a Gross or Net Basis”.   According to the clarification, a company acting as an agent or an   intermediary without bearing the risks and rewards resulting from the transaction,   will present its revenue on a net basis (as profit or commission). However, a   company that acts as a principal supplier and bears the risks and rewards   resulting from the transaction will present its revenue on a gross basis,   distinguishing the turnover from the related expenses.                                Standard 25   shall be applicable to financial statements for periods commencing on or   after January 1, 2006. The standard is to be applied prospectively;   nevertheless, in accordance with the transitional provisions of the standard,   the classification and presentation of revenue on a gross or net basis, as   above, shall be applied with retroactive effect, including the restatement of   revenues and expenses appearing in the comparative figures in the financial   statements for periods commencing on the effective date of the standard.                                Until the   publication of said standard and the related clarification, there were no   accounting pronouncements in Israel concerning revenue, and the accounting   treatment of this issue was mostly based on generally accepted accounting   practices and foreign accounting pronouncements; nevertheless, as the   principles applied by the company do not differ materially from the   directives of the standard, its implementation is not expected to have a material   effect on the financial statements of the company in future periods.    15    OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)                  NOTE 2   –   INVESTMENTS IN SUBSIDIARIES                   Following is a list of the subsidiaries consolidated in Ophir’s   financial statements:                   Wholly-owned:         Ophir Financing Ltd. - inactive;         Maoz Financial Investments Ltd. (“Maoz”) -   inactive;          Merkazim Investments Ltd. (“Merkazim”) a   wholly-owned subsidiary of Maoz. During 2005 Merkazim ceased its activity.          80%-owned - New Horizons (1993) Ltd. (“New   Horizons”).               NOTE 3   –   INVESTMENTS IN ASSOCIATED COMPANIES:                       a.   The investments are composed as follows:                                                              consolidated                                          December   31                                          2005       2004                                                 NIS in   thousands                                        Equity in net assets:                                     Cost of shares           7,252           14,449             Share in accumulated undistributed profit   (1)           81,825           83,984             Share in capital surplus derived by Mivnat   Holdings Ltd. from sale of its investment in Industrial Buildings Ltd. to its   Shareholders (see c(1) below and 4(a)) (1)           66,065           66,065                                                           155,142           164,498             Long-term loans (2)           3,056           28,731             L e s s - provision for impairment of   investment, see c(2), (3) below           (950   )       (5,954   )                                                       157,248           187,275                                                                        (1)   Including   accumulated erosion of capital notes and gains on dilution of holding in   associated companies resulting from issuance of shares to a third party.                               (2)   As of   December 2005 the loans are linked to the Israeli CPI, bear interest at   annual rates of 1% and have no fixed maturity date.                           b.   The changes in the investments in 2005 are as follows:                                                  NIS in   thousands                                        Balance at beginning of year           187,275             Changes during the year:                         Share in profits of associated companies - net           651             Loans to an associated company           746             Accrued linkage differentials and interest in respect of long-term   loans           1,007             Sale of investment           (32,431   )                                 Balance at end of year           157,248                                16    OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)                      NOTE 3   –   INVESTMENTS IN ASSOCIATED COMPANIES  (continued):                   c.   Following are details relating to the associated companies:                           1)   Mivnat   Holdings Ltd. (“Mivnat”)                                   Mivnat was   established in March 1993 by the Company, the subsidiary Merkazim and others,   some of whom were interested parties, in order to acquire the Israeli   Government’s shares in Industrial Buildings Ltd. (“Industrial Buildings”).   During March 1993, Mivnat acquired these shares in consideration of   NIS 1,053 million. Ophir holds 18.75% interest in Mivnat directly, and   25% interest jointly with Merkazim.                                    On   December 31, 1998, Mivnat sold its holdings in Industrial Buildings to   its shareholders (including the Company). Upon the consummation of the   transaction, Mivnat ceased to have any rights in the shares of Industrial   Buildings.                                   During 2004,   the Company realized all of its shares in Industrial Buildings see note 4a.                                2)   Shmey-Bar   Real Estate 1993 Ltd., Shmey-Bar (T.H.) 1993 Ltd.and Shmey-Bar (I.A.) 1993 Ltd. (“Shmey-Bar companies”).                                   The Company,   along with a group of companies, established the Shmey-Bar companies in 1993.   These companies were established for the purpose of dealing in development of   fruit-bearing properties. They purchased rights to real estate and options to   purchase real estate in Tel-Aviv, Haifa, Beer-Sheva, Kiryat Shemona, Eilat,   Jerusalem, Holon, Tel-Hanan and Ramla, all from Hamashbir Hamerkazi Israel   Cooperative Wholesale Society Ltd. The Company’s holdings in Shmey-Bar   companies total 22.2%.                                   On   December 31, 2002, the Company wrote down its investment in the   Shmey-Bar companies by NIS 5,004 thousands.                                   On September   20, 2005 the Company and Durban Investments Ltd. signed an agreement for the   sale of all its shares and rights (including indemnification of the Company   in connection with shareholders loan) in Smei Bar companies, the consideration   for the sale amounted to NIS 32.6 million; as a result of the sale of the   holdings as above, the Company recorded a loss in the amount of NIS 1,618   thousands, which includes expenses of NIS 1.8 million attributed to the sale.       17     OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)               NOTE 3   –    INVESTMENTS  IN  ASSOCIATED  COMPANIES   (continued):                                  3)   Lysh The   Coastal High-way Ltd. (“L1”)                                   In June   1999, the Company entered into an investment agreement with Lysh Commercial   and Road Services Ltd. (“L2”), a company controlled by Polar Investments Ltd.   - an interested party in the Company, and with L1, a wholly-owned subsidiary   of L2.                                   L1 has a 50%   holding in Beit Herut-Lysh Development Company Ltd. (“BHL”), which has   invested in a project for the leasing of commercial premises near Moshav Beit   Herut (the “project”).                                   BHL   developed 16,850 square meters of land owned by the Israel Lands   Administration (the “Administration”), in accordance with resolution 717 of   the Administration. A commercial project occupying approximately 10,000   square meters was constructed on that land initially, and there is an option   to construct an additional 4,000 square meters at a later stage. The   Company’s share in L1 is approximately 25% (its share in the project being   approximately 12.5%). The project commenced in March 2000. As of   December 31, 2005 and 2004, the Company invested in L1 approximately   NIS 5.5 million.                                   The Company   has also undertaken to provide guarantees in an amount equivalent to 25% of   the construction costs. As of December 31, 2005, the Company’s share in   the loans made to BHL amounts to approximately NIS 16.5 million.                                   The auditors   of L1, while not qualifying their opinion on L1’s financial statements for   2005, drew attention to the financial position of BHL, whose financial   statements presented a loss of approximately NIS 5.9 million (net of   financial expenses in the amount of NIS 7.1 million) and negative   working capital amounting to approximately NIS 3.8 million at   December 31, 2005.                                   In 2005, BHL   received shareholders’ loans in the amount of approximately NIS 2   million from L1. In 2004, it was agreed that payments of principal of the   loan for that year would be deferred.   During the reported year, the Company and the bank agreed that the   payments of principal of the loan for 2005 would be deferred and those   payments would be made no later than March 31, 2006 and schedules the   repayments of the balance of the loan over a period of 17 years.                                     BHL’s   management believes that the execution of the aforementioned arrangements   will guarantee the continuance of BHL’s regular operations.                                   In 2004, the   Company wrote down its investment in BHL Company by NIS 950,000.      18     OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)               NOTE 4   –    INVESTMENTS IN OTHER COMPANIES:                                                          Consolidated                                          December 31                                          2005       2004                                                 NIS in thousands                                        Industrial   Buildings (a)                       67,402             Memadim   Investments Ltd. (“Memadim”) (b)                       4,065             Mahalachim   Investment in Technology Ltd. (“Mahalachim”) (c)           1,351           1,351              Others           36           36                                                           1,387           72,854                                                                 a.   Industrial   Buildings is engaged in initiation and execution of construction projects -   buildings for industry, designated for rental and sale - and in the   management of land development and infrastructure preparation for residence   and industry.                           As of January   1, 2004, the Company held 36,281,616 ordinary shares of NIS 1 par value of   Industrial Buildings that constitute 11.84% of the ordinary share capital of   this company.                           In 2004, the   Company sold 4,400,036 shares of Industrial Buildings in consideration for   approximately NIS 21.2 million, at a pre-tax gain of approximately   NIS 0.3 million.                           In 2004, the   Company received a dividend in the amount of NIS 10.3 from Industrial   Buildings.                           In   January 2005, 15 million shares were sold in an off-the-floor   transaction for NIS 75 million, at a pre-tax gain of NIS 1.7   million. Consideration from sale of the said shares in the amount of NIS 68   million was utilized in 2005 for repayment of part of the balance of bank   loan in the amount of NIS 38.4 million, in favor of which the shares were   pledged.  Part of the consideration   from sale of the said shares in the amount of NIS 25 million is placed in a short-term deposit to secure   the balance of the remaining loan (NIS 26.3 million) that was repaid in January   and February 2006 (see note 6c). The   short-term deposit, as stated above, is included under short-term investments   at December 31, 2005.                           On February   9, 2005, the Company’s board of directors decided to distribute the remaining   shares of Industrial Buildings, in the amount of NIS 80.9 million to   shareholders, as a quasi-dividend. Additionally, the board decided to   distribute the balance of cash, in the amount of NIS 9.9 million, to   shareholders.                         b.   Memadim was   established in 1995 by the Company, along with a group of companies, one of   which is Industrial Buildings, for the purpose of real estate development.   The Company directly holds 10% of the ownership and control of Memadim. see   also note 8(1).                           The Company   currently negotiates the sale of its holdings in Meimadim; therefore, in 2005   the Company recorded in its accounts a provision of NIS 4,571 thousands for   impairment of its investment in this Company.                        c.   Mahalachim   is a venture capital fund; the Company holds approximately 3.5% of shares   therein. In 2004, the Company received a dividend in the amount of   NIS 3,255,000 from Mahalachim. The share of the dividend that was   carried to income amounted to NIS 1,320,000. The balance of the amount   was used to reduce the amount of the investment.    19     OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)               NOTE 5   –    FIXED ASSETS - BULDINGS FOR RENT:                    Composition of assets (buildings for rent - including land) as of   December 31, 2004 are as follows                                                  Cost       Accumulated      depreciation       Depreciated    balance                                                N I S  i n  t h o u s a n d s                                                                                66,247       8,822       57,425                                                                 The Company   had rights in an industrial commercial building on leased land for a period   of 44 years, which will expire on October 31, 2037, jointly with other   companies. The building is leased as part of a joint venture, the Copany   share in which is 70%.                            On July 11,   2005, the Company sold its share in the rights in a commercial-industrial   building in consideration for NIS 51 million.  The Company recorded a loss of NIS 7.5 million in respect of   this transaction.                NOTE 6   –    LONG-TERM BANK LOANS:                        a.   The loans   are linked to the Israeli CPI and bear interest at the annual rate of 4%.                        b.   An early   repayment of NIS 38.4 million was made in 2005.  The balance of the loan is to be repaid in accordance with an   updated clearing schedule received from the bank.                        c.   The original   clearing schedule of the loans for the years subsequent to balance sheet date   is as follows:                                                          December 31                                          2005       2004                                                 NIS in thousands                                                        First year -   current maturities           3,759           8,382                                               Second year           3,759           8,382             Third year           3,759           8,382             Fourth year           3,759           8,382             Fifth year           3,759           8,382             Sixth year   and thereafter (through 2012)           7,516           25,147                                                           22,552           58,675                                                           26,311           67,057                                                                 d.   An early   repayment of 26.3 million (the balance of the said loans) was made in January   and February 2006.    20     OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)                   NOTE 7   –    CAPITAL NOTES:          a.   On   December 31, 1998, the Company and a subsidiary, Merkazim, issued   capital notes to Mivnat with a par value of NIS 113,770,000 and   NIS 37,831,000, respectively. The capital notes are unlinked and   interest-free.               Capital   notes with an aggregate par value of NIS 151,351,000 are repayable at   par, upon demand of Mivnat, on January 1, 2005 and only on that date.   After balance sheet date, the shareholders of Mivnat decided to extend the   repayment date until January 1, 2007. The balance of the capital notes,   NIS 250,000 par value, is repayable annually under the terms stipulated   in the agreement.                  b.   On   December 31, 1998 and on June 30, 2004, the Company issued capital   notes to its subsidiary with a par value of NIS 37,769,000 and   NIS 25,409,000, respectively. The capital notes are unlinked and interest-free,   and are repayable at par, upon demand, on January 1, 2005 and only on   that date. After balance sheet date, the shareholders of Merkazim decided to   extend the repayment date until January 1, 2007.           c.   In 2002, the   subsidiary New Horizons issued capital notes with a par value of   NIS 119,000 and NIS 1,069,000 to the Company and the minority   shareholder in the subsidiary, respectively. the Company and the minority   shareholder in the subsidiary are entitled to receive from New Horizons the principal   of the note, without interest or linkage, this after a period of not less   than one year.      21     OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)                       NOTE 8   –    COMMITMENTS, PLEDGES AND LIMITATIONS IN RESPECT OF LIABILITIES:             1)   The Company   has undertaken to invest in Memadim (see note 4b) approximately 10% of the   cost of land and construction of a rental project which is constructed by   Memadim on the Carmel shore. The investment was made partly through   investment in Memadim (mainly shareholders’ loans), and partly by way of a   guarantee provided. The Company’s share in future construction costs is   estimated at approximately U.S.$ 17 million. As of December 31, 2005, the   balance of the loans to Memadim from banks amounts to approximately   NIS 89 million, and the balance of the loans to Memadim from interested   parties as of December 31, 2005 amounts to approximately NIS 45   million see note 4b.                               2)   In December   1996, the subsidiary New Horizons acquired real estate (designated for sale)   from a then interested party, which holds 20% of New Horizons’ shares. The   selling company will be entitled to 90% of the profits from the subsequent   sale of the real estate, with the balance accruing to New Horizons. The   registration of the real estate in New Horizons’ name in the Land Registry   has not yet been completed.                                   On December   4, 2005, the subsidiary was granted an irrevocable option to sell all the   rights in the real estate inventory that it owns for a consideration of 17,330 thousands dollar.                                    The option period is limited to June 15,   2006.  As of the date of approval of   these financial statements, the subsidiary had not exercised the option   granted to it.                               3)   As to the   Company’s commitment to grant guarantees to BHL, see note 3c(3).                               4)   The Company   and a subsidiary receive various services from the shareholders in Ophir,   including management services, head office services, bookkeeping and legal   services. As to the expenses recorded in respect of such services, see   note 11.      22     OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)                   NOTE 9   –    SHARE CAPITAL:                    a.   Composed at   December 31, 2005 and 2004 as follows:                                                                                  Number of shares       Amount in NIS                                                 Authorized       Issued    and paid       Authorized       Issued    and paid                                                       Ordinary   shares of NIS 0.001                                                             par value           160,000           100,000           162           101                                                                   Deferred   shares of NIS 0.0001                                                             par value*           3           3           0.0003           0.0003                                                                                            *   The deferred   shares confer upon their holders the right to receive their par value upon   liquidation of the Company.                        b.   In February   2005 the Company’s board of directors resolved to distribute its shareholders   the balance of the shares of Industrial Buildings (amounting to NIS 80,930   thousands) as a dividend in kind.   Also, the Company distributed its shareholders a cash dividend of NIS   9,990 thousands.                           Also, on   October 16, 2005, the Company’s board of directors resolved to distribute the   shareholders a dividend in the total amount of NIS 82 million.  For the purpose of distributing this   dividend, the Company requested the Court to approve a deduction of capital   for the Company in an amount of up to NIS 64 million.  On November 29, 2005, the Court approved   the said request.                           At a later   date, in order to clarify the board of directors’ resolution dated October   16, 2005 and the Company’s shareholders’ resolution dated November 6, 2005 to   approve a certain amount out of which the Company would distribute its   shareholders a dividend in the total amount of up to NIS 82 million for the   years 2005 and 2006 and in light of the Tel-Aviv District Court’s resolution   to approve a distribution of dividend that does not meet the criteria of the   “profit test” as required under Section 303 of the Companies Law, 1999 and   also since in December 2005 the owners of the Company resolved that the   declaration and distribution of the dividend will take place in 2005 and   2006, the board approved in February 2006 the declaration and distribution of   dividend to the shareholders, as follows: a total of NIS 20 million paid in   cash on December 28, 2005 and a total of NIS 55 million on January 8, 2006.    23     OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)                   NOTE 10   –    TAXES ON INCOME:                         a.    Measurement of results for tax purposes under the Income Tax   (Inflationary Adjustments) Law, 1985 (hereafter - the inflationary adjustments   law)                           Under the   inflationary adjustments law, results for tax purposes are measured in real   terms, having regard to the changes in the Israeli CPI. The Company and its   Israeli subsidiaries are taxed under the inflationary adjustments law.                        b.    Deferred income taxes:                           The   composition of the deferred taxes, and the changes therein during the   reported years, are as follows:                                              Depreciable fixed assets                                          NIS in thousands                                        Balance at   January 1, 2004           (2,676   )               Changes in   2004- amounts carried to income           (126   )                                       Balance at   December 31, 2004           (2,550   )               Changes in   2005- amounts carried to income           2,550                                     Balance at   December 31, 2005           -,-                                               Deferred   taxes are presented in the balance sheets as long-term liabilities.                               c.    Taxes on income included in the income statements:                               1)   As follows:                                                                      2005       2004       2003                                                        NIS in thousands                                        For the   reported year:                                                 Current                                   1,760             Deferred, see also b. above           (2,550   )       (126   )       2,971                                                                     (2,550   )       (126   )       4,731                                                         For previous   years- current           (2,705   )       2,500                                                                                 (5,255   )       2,374           4,731                                                                              Current   taxes are computed at the tax rate of 34%. For tax  rates amendment see (e) below.    24     OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)                       NOTE 10   –    TAXES ON INCOME (continued):                   2)   Following is   a reconciliation of the theoretical tax expense, assuming all income is taxed   at the regular tax rates applicable to companies in Israel (see (1) above),   and the actual tax expense:                                                                      2005       2004       2003                                                        NIS in thousands                                        Income (loss) before taxes on income as   reported in the income statements           (11,420   )       16,669           7,027             Add (less) -   share in profits of associated companies - net           651           1,150           2,071                                                         B a l a n c   e - income (loss)           (12,071   )       17,819           9,098                                                         Theoretical   tax expense (tax saving)           (4,104   )       6,237           3,275             Increase (decrease) in taxes resulting from   permanent differences - the tax effect:                                                 Disallowable deductions (exempt income)           (626   )       337           (156   )         Differences for which deferred taxes were   not created, net           2,224           (870   )       4,101             Taxes on income subject to different rates   - dividends received from other companies                       (4,418   )       (2,843   )         Taxes in respect of previous years           (2,705   )       2,500                         Difference between the basis of measurement   of income reported for tax purposes and the basis of measurement of income   for financial reporting purposes - net           (309   )                                 Sundry – net           265           (1,412   )       354                                                         Taxes on   income for the reported year           (5,255   )       2,374           4,731                                                                           d.    Tax assessments                           The Company   has received final assessments through tax year 2001.                             Subsidiaries:                           Merkazim -   final assessments has been received through tax year 2004.              New Horizons   - assessments that are considered as final through tax year 2001.               Ophir   Financing Ltd. -  assessments that are   considered as final through tax year 2001.                           e.    Tax rates                           The   Company’s income in Israel is subject to the regular corporate tax rate;   until December 31, 2003, a corporate tax rate of 36% was applied. In   July 2004, an Amendment to the Income Tax Ordinance was published, which   determined, inter alia, that the rate of corporate tax will be gradually   reduced from 36% to 30%, in the following manner: the rate for 2004 will be   35%, in 2005 - 34%, in 2006 - 32%, and in 2007 and thereafter - 30%.                            In August   2005, a further amendment (No. 147) was published, which makes a further   revision to the corporate tax rates prescribed by Amendment   No. 140.  As a result of the   aforementioned amendments, the corporate tax rates for 2004 and thereafter   are as follows: 2004 - 35%,  2005 -   34%, 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 - 26% and for 2010 and   thereafter - 25%.     25     OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)               NOTE 10   –    TAXES ON INCOME (continued):                           f.    “Real” losses on realization of marketable securities for tax   purposes, carried forward to future years                           Carryforward   “real” losses on realization of marketable securities at December 31,   2005 aggregate NIS 36 million; December 31, 2004 - NIS 11   million.  The “real” losses are   deductible from future real income from marketable securities, if any.  No deferred tax assets have been included   in respect of such losses, as it is not probable that they will be utilized   in the foreseeable future.           NOTE 11   –   TRANSACTIONS AND BALANCES WITH RELATED PARTIES:                        a.    Transactions with related parties:                                                                      2005       2004       2003                                                        NIS in thousands                                  Income   (expenses):                                                                                                   Linkage differences on short- term loans to   related party company           194                       165                                                            Financial income on loan to shareholders   and associated companies           1,607           1,371           637                                                          Management fees from other company                       433           438                                                            Included in general and administrative   expenses                                   (3,507   )                                                         Participation in expenses of shareholders   and a corporate interested party                                   (250   )                                                         Management fees to shareholder           1,000                                                                                                                                       As to other   transactions with, and commitments to, interested parties, see note 8.                                                                                 b.    Balances with related parties:                               1)   Receivables:                                                          December 31                                          2005       2004                                                 NIS in thousands                                        a) Loan to a   corporate interested party (1)           8,306           8,114                                               b) Long-term   receivables - loans to associated companies (2)           3,056           28,731                                               c) A   corporate related party  current   account                                     d)   Shareholders - current accounts           54,952           151                                                                                (1)   The   loan is linked to the Israeli CPI and bears no interest.                                           The   corporate related party is to repay this debt out of its future positive   cash  flow.                                       (2)   The loans are linked to the Israeli CPI and bear annual interest at   the rate of 1%.                                            As   to current balances with associated and other companies, see note 13a.                               2)   Long-term liability in   respect of acquisition of land - business inventory - is linked to the   Israeli CPI and bears no interest.    26     OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)                   NOTE 12   –    LINKAGE OF MONETARY BALANCES:                    a.    As follows:                                                                      December 31, 2005                                          Linked   to the   Israeli CPI       Unlinked       Total                                                        NIS in thousands                                        Assets:                                                 Current assets:                                                 Cash and cash equivalents                       2,396           2,396             Short-term investments           24,549           469           25,018             Accounts receivable           55,419           10,595           66,014             Loan to a related party           8,306                       8,306             Long-term loans to associated companies           3,056                       3,056                                                                     91,330           13,460           104,790                                                         Liabilities:                                                 Current liabilities:                                                 Short-term credit from bank                       75           75             Accounts payable and accruals                       4,245           4,245             Long-term liabilities:                                                 Bank loans (including current maturities)           26,311                       26,311             Capital notes to associated company                       151,601           151,601             Capital note to an interested party                       1,069           1,069             Acquisition of land - business inventory           11,894                       11,894                                                                     38,205           156,990           195,195                                                                           b.    Data regarding the exchange rate and the Israeli CPI:                                                          Exchange rate of one dollar       Israeli CPI*                                         At end of   year:                                     2005       NIS 4.603       185.1 points             2004       NIS 4.308       180.7 points             2003       NIS 4.379       178.6 points             2002       NIS 4.737       182.0 points                                                   Increase   (decrease) during the year:                                     2005       6.8   %       2.4   %             2004       (1.6   ) %       1.2   %             2003       (7.5   ) %       (1.9   ) %                              *   Based on the   index for the month ending on each balance sheet date, on the basis of 1993   average = 100.    27     OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)               NOTE 13   –    SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:                    Balance sheets:                                                                  December 31                                                  2005       2004                                                         NIS in thousands                                       a.    Accounts receivable - other:                                               Deposits in respect of sale of fixed assets           10,280           3,500                 Associated and others companies           467           626                 Other           315           727                                                                   11,062           4,853                                                    b.    Bank credit:                                         Short-term credit and loans           75           1                 Current maturities of long- term loans, see   note 6           3,759           8,382                                                                   3,834           8,383                                                    c.    Accounts payable and accruals:                                         Trade           21           370                 Institutions           2,516           2,545                 Accrued expenses           404           202                 Other           1,304           1,004                                                                   4,245           4,121                                                    d.    Concentrations of credit risks                                                                                   The Group’s   cash and cash equivalents and short-term investments at December 31,   2005 and 2004 are deposited with Israeli banks. The Company is of the opinion   that the credit risk in respect of these balances is remote.    28     OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)                   NOTE 13   –    SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION   (continued):                    e.    Fair value of financial instruments                           The fair   value of financial instruments included in the working capital of the Group   is usually identical or close to their carrying value. The fair value of   long-term loans to associated and other companies and long-term bank loans   also approximates their carrying value, since they bear interest at rates   close to prevailing market rates. The determination of the fair value of the   capital notes to an associated company and a subsidiary and long-term   liabilities in respect of acquisition of land - business inventory is not   practical.                                                                              2005       2004       2003                                                                NIS in thousands                                                                                             f.    Financial expenses (income) - net:                                                                                           Financial expenses:                                                     In respect of long-term loans           3,593           3,692           3,324                  In respect of short-term bank credit           11                       232                 Other           250           84           138                                                                              3,854           3,776           3,694                                                                  Financial income:                                                     In respect of bank deposits           1,777           1,354           411                  Financial income on loan to shareholders           600                                         In respect of loans to a related party           194                                         In respect of short-term loans to   associated companies           1,007           1,371           637                  Assigned interest and linkage differences   and other           459           351           1,114                                                                             4,037           3,076           2,162                                                                              (183   )       700           1,532                                                         29     OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)               NOTE 14   –    EFFECT OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING   PRINCIPLES IN ISRAEL AND IN THE U.S.A.:                               a.    General:                           1)   The Company   prepares its financial statements in accordance with Israeli GAAP. As   applicable to these financial statements, Israeli GAAP and U.S. of America   GAAP vary in certain significant respects, as described below:                               2)   Effect of   inflation                                   In accordance   with Israeli GAAP, through December 31, 2003, the Company comprehensively   included the effect of the changes in the general purchasing power of Israeli   currency in these financial statements, as described in note 1b. In view   of the past inflation in Israel, this was considered a more meaningful   presentation than financial reporting based on historical cost.                                   Under US   GAAP Israel is not considered to be a highly inflationary country, thus the   measurement currency should be in nominal NIS.                                   The   adjustments to reflect the changes in the general purchasing power of Israeli   currency have been reversed in the reconciliation of Israeli GAAP to U.S.   GAAP.                               3)   Investment   in marketable securities                                   In   accordance with Israeli GAAP, since the Company’s intent was to hold some of   the investment as an investment for a long period, it was partly stated at   cost, net of impairment for decrease in value, which was other than temporary   decline in their value. During 2005 the company sold its investment (see also   note 4).                                   Under U.S.   GAAP, this investment was classified as an investment in available for sale   and was reported at fair value with unrealized gains and losses, recorded as   a separate component of other comprehensive income (loss) in shareholders’   equity until realized in 2005.    30     OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)                       NOTE 14   –    EFFECT OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING   PRINCIPLES IN ISRAEL AND IN THE U.S.A. (continued):                    b.   The effect   of the material GAAP differences, as described in a. above, on the   consolidated financial statements is as follows:                           1)   Operating   results:                                                                      2005       2004       2003                                                        NIS in thousands                                                        Net income (losses) as reported in these   financial statements according to Israeli GAAP)           (6,165   )       14,296           2,311              Effect of the treatment of the following   items under U.S. GAAP:                                                 Reversal of the adjustment due to effect of   inflation           76,050           7,631           39,051              Reversal of the adjustment due to   Marketable securities- available for sale           1,985           (2,256   )                     Other           478           107           (405   )                                                     Net income under U.S. GAAP           72,348           19,778           40,957                                                                                   2)   Shareholders’   equity:                                                          December 31,                                          2005       2004                                                 NIS in thousands                                                        Shareholders’ equity, as reported in these   financial statements, according to Israeli GAAP           78,197           195,282             Effect of the treatment of the above   differences under U.S. GAAP:                                     Reversal of the adjustment due effect of   inflation, net           (1,697   )       (77,747   )         Reversal of the adjustment due marketable   securities-available for sale                       (3,061   )         Other comprehensive income-marketable   securities                       61,182             Other           218           (545   )                                           Shareholders’ equity under U.S. GAAP           76,718           175,111                                          31     OPHIR HOLDINGS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)                       NOTE 14   –    EFFECT OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING   PRINCIPLES IN ISRAEL AND IN THE U.S.A. (continued):                               3)   The effect   of the foregoing GAAP difference on reporting comprehensive income, is as   follows:                                                                      2005       2004       2003                                                        NIS in thousands                                        Net income as reconciled to U.S. GAAP, see   above           72,348           19,778           40,957              Other comprehensive income - gains not reported (previously reported) in the income statements-                                                 Unrealized (realized) gains on marketable   securities           (61,182   )       20,659           78,278                                                                                                            Comprehensive income under U.S. GAAP           11,166           40,437           119,235                                                                            32    OPHIRTECH LTD. (An Israeli Corporation) 2005 ANNUAL REPORT        OPHIRTECH LTD. 2005 ANNUAL REPORT TABLE OF CONTENTS                  Page     REPORT OF INDEPENDENT AUDITORS   2     FINANCIAL STATEMENTS – IN NEW ISRAELI SHEKELS (NIS):         Balance sheets   3     Statements of operations   4     Statements of changes in shareholders’   equity   5     Statements of cash flows   6     Notes to financial statements   7-19                          REPORT OF INDEPENDENT AUDITORS To the shareholders of  OPHIRTECH LTD. We have audited the financial statements of Ophirtech Ltd. (hereafter - the Company): balance sheets as of December 31, 2005 and 2004 and the related statements of income, changes in shareholders’ equity and cash flows for the three years ended December 31, 2005. These financial statements are the responsibility of the Company’s board of directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Boards (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.  In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2005 and 2004 and the results of operations and cash flows of the Company for the three years ended December 31, 2005, in conformity with accounting principles generally accepted in Israel.  As explained in note 1b, the financial statements, as of dates and for reporting periods subsequent to December 31, 2003, are presented in new Israeli shekels, in conformity with accounting standards issued by the Israel Accounting Standards Board. The financial statements as of dates and for reporting periods ended prior to, or on, the above date are presented in values that have been adjusted for the changes in the general purchasing power of the Israeli currency through that date, in accordance with pronouncements of the Institute of Certified Public Accountants in Israel.  Accounting principles generally accepted in Israel vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 7 to the financial statements.                   Tel-Aviv,   Israel       Kesselman & Kesselman     March 27, 2006       Certified Public Accountants (Isr.)    2    OPHIRTECH LTD. BALANCE SHEETS                                                                      December 31                                                  Note       2005       2004                                                                NIS in thousands   (see note 1b)                                      A s s e t s                                                                                           CURRENT ASSETS:                                             Cash                       151           811         Government                       28           49                                                   T o t a l  current   assets                       179           860                                                   INVESTMENTS IN COMPANIES           1c ; 2           32,809           36,063                                                                           32,988           36,923                                                   Liabilities and shareholders’ equity                                                                                           CURRENT LIABILITIES:           6a(2)                                 Short-term credit:                                             From bank credit           6a                       966         From shareholders                       4,125           4,267         Loan from a related party           6b           8,306           8,114         Accounts payable and accruals                                   23                                                   T o t a l  current liabilities                       12,431           13,370         SHAREHOLDERS’ EQUITY           3           20,557           23,553                                                                           32,988           36,923                                                                        )                      Avi Israel   )             )   DIRECTORS         )                      Shlomo Shalev   )        Date of approval of the financial statements: March 27, 2006  The accompanying notes are an integral part of the financial statements. 3    OPHIRTECH LTD. STATEMENTS OF OPERATIONS                                                          2005       2004       2003                                                NIS in thousands (see note 1b)                          WRITE-DOWN OF INVESTMENTS IN COMPANIES, net           2,814                           1,239           GENERAL AND ADMINISTRATIVE EXPENSES (note 6e)           34             3             251           FINANCIAL EXPENSES – net           148             139             416           CAPITAL LOSS ON SALE OF FIXED ASSETS                                     2                                                   LOSS FOR THE YEAR           2,996             142             1,908                                                  The accompanying notes are an integral part of the financial statements. 4    OPHIRTECH LTD. STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY                                                                      Share   capital       Receipts on   account   of shares   to be allotted       Accumulated   deficit         Total                                                             NIS in thousands (see note 1b)                                      BALANCE AT JANUARY 1, 2003           1             137,622             (112,019     )         25,603                   CHANGES DURING 2003 - loss                                       (1,908     )         (1,908     )                                                             BALANCE AT DECEMBER 31, 2003           1             137,622             (113,927     )         23,695                   CHANGES DURING 2004 - loss                                       (142     )         (142     )                                                             BALANCE AT DECEMBER 31, 2004           1             137,622             (114,069     )         23,553                   CHANGES DURING 2005 - loss                                       (2,996     )         (2,996     )                                                             BALANCE AT DECEMBER 31, 2005           1             137,622             (117,065     )         20,557                                                                  The accompanying notes are an integral part of the financial statements. 5    OPHIRTECH LTD. STATEMENTS OF CASH FLOWS                                                          2005       2004       2003                                                NIS in thousands (see note 1b)                          CASH FLOWS FROM OPERATING ACTIVITIES:                                             Loss for the year           (2,996   )       (142   )       (1,908   )     Adjustments to reconcile net loss to net   cash provided by (used in) operating activities*           3,004                       714                                                 Net cash provided by (used in) operating   activities           8           (142   )       (1,194   )                                             CASH FLOWS FROM INVESTING ACTIVITIES:                                             Proceeds from disposal of investments           1,746           1,699                     Investment in companies           (1,306   )                   (3,089   )     Proceeds from sale of fixed assets                                   70                                                 Net cash provided by (used in) investing   activities           440           1,699           (3,019   )                                             CASH FLOWS FROM FINANCING ACTIVITIES:                                             Short-term credit loans from shareholders -   net           (142   )       101           4,166         Increase in short term loan from a related   party                                   191         Short-term bank credit           (966   )       (873   )       (124   )                                             Net cash provided by (used in) financing   activities           (1,108   )       (772   )       4,233                                                 INCREASE (DECREASE) IN CASH AND CASH   EQUIVALENTS           (660   )       785           20         BALANCE OF CASH AND CASH EQUIVALENTS AT   BEGINNING OF YEAR           811           26           6                                                 BALANCE OF CASH AND CASH EQUIVALENTS AT END   OF YEAR           151           811           26                                                 * Adjustments to reconcile net loss to net   cash provided by (used in) operating activities:                                             Expenses not involving cash flows:                                             Depreciation                                   7         Write-down of investments in companies, net           2,814                       1,239         Capital loss on sale of fixed assets                                   2         Linkage differences of a loan from a   related party           192                       165                                                               3,006                       1,413                                                   Changes in operating asset and liability   items:                                             Decrease (increase) in accounts receivables           21                       (33   )     Decrease in accounts payable and accruals           (23   )                   (666   )                                                           (2   )                   (699   )                                                           3,004                       714                                                  The accompanying notes are an integral part of the financial statements. 6    OPHIRTECH LTD. NOTES TO FINANCIAL STATEMENTS                      NOTE 1   –   SIGNIFICANT ACCOUNTING POLICIES                            The   significant accounting policies, applied on a consistent basis, are as   follows:                            a.   General:                                1)   Ophirtech   Ltd. (the “Company”), invests in start-up companies in various stages of   development, from newly established enterprises to companies that have reached   advanced development stage.                                    On March 30,   2000, the Company purchased investments in high-tech companies engaged in   various fields of activity (communications, software, security, etc.) from   Ophir Holdings Ltd. (“Ophir Holdings”), which at that time was a company   under common control, for approximately adjusted NIS 76 million. The   difference between the proceeds and the carrying value of those investments   on the books of Ophir Holdings was carried to the Company’s accumulated   deficit, in accordance with the Israeli Securities (Presentation in Financial   Reports of Acts between Body Corporate and its Controlling Member)   Regulations, 1996.                                2)   Related   parties - as defined in Opinion 29 of the Israeli Institute.                                3)   Principles   of accounting                                    The   financial statements have been prepared in accordance with accounting   principles generally accepted in Israel (Israeli GAAP). Israeli GAAP vary in   certain significant respects from accounting principles generally accepted in   the United States of America. Information relating to the nature and effect   of such differences is presented in note 7.                            b.   Financial statements presentation basis:                                The company   draws up and presents its financial statements in Israeli currency (hereafter   - shekels or NIS).                                1)   Transition   to nominal financial reporting in 2004                                    With effect   from January 1, 2004, the company has adopted the provisions of Israel   Accounting Standard No. 12 –“Discontinuance of Adjusting Financial Statements   for Inflation” – of the Israel Accounting Standards Board (hereafter –the   IASB) and, pursuant thereto, the company has discontinued, from the aforesaid   date, the adjustment of its financial statements for the effects of inflation   in Israel.                                   The amounts   adjusted for the effects of inflation in Israel, presented in the financial   statements as of December 31, 2003 (hereafter – “the transition date”), were   used as the opening balances for the nominal financial reporting in the   following periods. Additions made after the transition date have been   included in the financial statements at their nominal values.                                   Accordingly,   the amounts reported for 2003, as well as reported amounts for subsequent    7    OPHIRTECH LTD. NOTES TO FINANCIAL STATEMENTS (continued)                      NOTE 1   –   SIGNIFICANT ACCOUNTING POLICIES (continued):                           b.   Financial statements presentation basis (continued):                                   periods,   that relate to non-monetary assets including “permanent” investment and   equity items,   which originate from the period that preceded the transition date, are based   on the adjusted-for-inflation data (based on the CPI for December 2003), as   previously reported. All the amounts originating from the period after the   transition date are included in the financial statements at their nominal   values.                                    Through   December 31, 2003, the company prepared its financial statements on the basis   of historical cost adjusted for the changes in the general purchasing power   of Israeli currency (“NIS”), based upon changes in the consumer price index   (hereafter – the CPI), in accordance with pronouncements of the Institute of   Certified Public Accountants in Israel (hereafter – the Israeli Institute).                                    In 2003, the   components of the income statements were, for the most part, adjusted as   follows: the components relating to transactions carried out during the   reported period were adjusted on the basis of the index for the month in   which the transaction was carried out, while those relating to non-monetary   balance sheet items were adjusted on the same basis as the related balance   sheet item. The financing component represents financial income and expenses   in real terms and the erosion of balances of monetary items during the year.                                2)   The amounts   of non-monetary assets do not necessarily represent realization value or   current economic value, but only the reported amounts of such assets, as   described in (1) above. In these financial statements, the term “cost”   signifies cost in reported amounts.                            c.   Investments in companies                                The   investments in the shares of these companies are presented at cost net of   write down for decrease in value, which is not of a temporary nature.                                The Company   performs from time to time fair value evaluations of its investments in   start-up and development companies and includes, when necessary, a write-down   for decrease in value which is not of a temporary nature, see also d.   hereafter.     8    OPHIRTECH LTD. NOTES TO FINANCIAL STATEMENTS (continued)                      NOTE 1   –   SIGNIFICANT ACCOUNTING POLICIES (continued):                           d.   Impairment of assets:                                1)   The company   reviews - at each balance sheet date - whether any events have occurred or   changes in circumstances have taken place, which might indicate that there   has been an impairment of fixed assets and identifiable intangibles. When   such indicators of impairment are present, the company evaluates whether the   carrying value of the asset in the company’s accounts can be recovered from   the cash flows anticipated from that asset, and, if necessary, records an   impairment provision up to the amount needed to adjust the carrying amount to   the recoverable amount.                                    The   recoverable value of an asset is determined according to the higher of the   net selling price of the asset or its value in use to the company. The value   in use is determined according to the present value of anticipated cash flows   from the continued use of the asset, including those expected at the time of   its future retirement and disposal.                                2)   During 2005,   the company has written-down its investments in companies in the total amount   of 2,814 thousands NIS (2004- NIS 0; 2003- NIS 1,239 in thousand).                           e.   Loss per NIS 1 of par value of shares                                The   financial statements do not include data regarding loss per NIS 1 of par   value of shares, since the data would not provide significant additional   information to that otherwise provided by the financial statements.                            f.   Linkage basis                                Balances the   linkage arrangements in respect of which stipulate linkage to the last index   published prior to date of payment are stated on basis of the last index   published prior to balance sheet date (the index for November).                            g.   Use of estimates in the preparation of financial statements                                The   preparation of financial statements in conformity with generally accepted   accounting principles requires management to make estimates and assumptions   that affect the reported amounts of assets and liabilities and disclosure of   contingent assets and liabilities at the dates of the financial statements   and the reported amounts of revenues and expenses during the reporting   periods. Actual results could differ from those estimates.     9    OPHIRTECH LTD. NOTES TO FINANCIAL STATEMENTS (continued)                  NOTE 1   –   SIGNIFICANT ACCOUNTING POLICIES (continued):                       h.   Data regarding the exchange rate and the Israeli CPI:                                                   Exchange   rate of one   U.S. dollar       Israeli   CPI*                                         At end of   year:                             2005       NIS 4.603       185.05 points             2004       NIS 4.308       180.74 points             2003       NIS 4.379       178.58 points                   Increase   (decrease) during:                             2005       6.8%       2.4%             2004       (1.6%)       1.2%             2003       (7.6%)       (1.9%)                                           * Based on   the index for the month ending on each balance sheet date, on the basis of 1993   average = 100.                              i.   Recently issued accounting pronouncements in Israel:                                1)   In August   2005, the Israel Accounting Standards Board issued Israel Accounting Standard   No. 22 – “Financial Instruments: Disclosure and Presentation”, which is based   on International Accounting Standard No. 32. This standard prescribes the   rules for the presentation of financial instruments and the proper disclosure   required therefor. The standard sets forth the rules for classifying   financial instruments, the rules for splitting and classifying compound   financial instruments and the rules for offsetting financial assets and   financial liabilities. The standard also prescribes the rules for classifying   interest, dividends, losses and gains relating to financial instruments. This   accounting standard applies to financial statements for periods commencing on   or after January 1, 2006. The standard is to be applied prospectively and,   accordingly, comparative data that are presented in the financial statements   for periods commencing from the effective date of the standard will not be   re-presented. Financial instruments issued before the standard’s effective   date are to be classified and presented in conformity with the provisions of   the standard from its effective date. Compound financial instruments (that   include both an equity component and a liability component), which were   issued in periods prior to the standard’s effective date, and which had not   yet been converted or redeemed at that date, are to be classified according   to their component parts and are to be presented in conformity with the   provisions of the standard, commencing from the effective date of the   standard.                                    When the   standard becomes effective, the Israeli institute’s Opinion 48 – “Accounting   Treatment of Option Warrants”, and Opinion 53 – “Accounting Treatment of   Convertible Liabilities” will be revoked.    10    OPHIRTECH LTD. NOTES TO FINANCIAL STATEMENTS (continued)                      NOTE 1   –   SIGNIFICANT ACCOUNTING POLICIES (continued):                           i.   Recently issued accounting pronouncements in Israel (continued):                                   In the   Company’s opinion, implementation of this standard is not expected to have a   material effect on its financial statements in future periods.                                2)   In February   2006, the IASB issued Israel Accounting Standard No. 25 - “Revenue”, which is   based on International Accounting Standard No. 18. This standard prescribes   recognition, measurement, presentation and disclosure criteria for revenues   originating from the sale of goods purchased or manufactured by the company,   the provision of services, as well as revenues deriving from the use of the   company’s assets by others (interest income, royalties or dividends).                                    The   principal issue in accounting for revenue is determining the timing of   revenue recognition. Revenue from the sale of goods shall be recognized when   all the following conditions have been satisfied: (a) the significant risks   and rewards of ownership of the goods have been transferred to the buyer; (b)   the company retains neither continuing managerial involvement to the degree   usually associated with ownership nor effective control over the goods sold;   (c) the amount of revenue can be measured reliably; (d) it is probable that   the economic benefits associated with the transaction will flow to the   company; and (e) the costs incurred or to be incurred in respect of the   transaction can be measured reliably.                                    A   clarification of said standard was issued by the IASB in February 2006:   Clarification No. 8 - “Reporting of Revenue on a Gross or Net Basis”.   According to the clarification, a company acting as an agent or an   intermediary without bearing the risks and rewards resulting from the   transaction, will present its revenue on a net basis (as profit or   commission). However, a company that acts as a principal supplier and bears   the risks and rewards resulting from the transaction will present its revenue   on a gross basis, distinguishing the turnover from the related expenses.                                    Standard 25   shall be applicable to financial statements for periods commencing on or   after January 1, 2006. The standard is to be applied prospectively;   nevertheless, in accordance with the transitional provisions of the standard,   the classification and presentation of revenue on a gross or net basis, as   above, shall be applied with retroactive effect, including the restatement of   revenues and expenses appearing in the comparative figures in the financial   statements for periods commencing on the effective date of the standard.                                    Until the   publication of said standard and the related clarification, there were no   accounting pronouncements in Israel concerning revenue, and the accounting   treatment of this issue was mostly based on generally accepted accounting   practices and foreign accounting pronouncements; nevertheless, as the   principles applied by the company do not differ materially from the   directives of the standard, its implementation is not expected to have a   material effect on the financial statements of the company in future periods.       11    OPHIRTECH LTD. NOTES TO FINANCIAL STATEMENTS (continued)              NOTE 2   –   INVESTMENTS IN COMPANIES:                    The composition of the investments is as follows:                                                                                   December 31                                                      2005       Percentage       2004                                        of                                        Book       ownership/       Book                     Cost       value       Control*       value                                                               NIS in thousands       %       NIS in   thousands                                                Pelican Security Ltd. - “Pelican” (a)           8,885           4                       930                                                                           Expand Networks Ltd. - “Expand” (b)           10,033           10,033           9.3           9,378                                                                           Mainsoft Corporation - “Mainsoft” (c)           500           500           1.9           500                                                                           Netformx Ltd. - “Netformx” (d)           9,907           2,322           6.2           2,322                                                                           StoreAge Networking Technologies Ltd. - “StoreAge” (e)           13,946           13,946           10.9           13,292                                                                           Celvibe Ltd. - “Celvibe” (f)           12,278           -,-           13.1           163                                                                           Viola Networks Ltd. - “Viola” (g)           14,088           6,004           5.8           6,004                                                                           Cerel Ceramic Technologies Ltd. - “Cerel” (h)           4,451           -,-           15.9           3,474                                                                           Others (i)           57,708           -,-                       -,-                                                                     T o t a l           131,796           32,809                       36,063                                                                     * Ownership/   Control on a full and undiluted basis.                          (a)   Pelican is   engaged in the development of solutions to the problem of safeguarding   information on the Internet against viruses and hackers.                            In February   2003, Pelican sold the know-how that it had developed and owned.Pelican was   appointed an outside liquidator who, in 2005, had transferred to the company   an aggregate of NIS 626,000 out of the liquidation monies.                        (b)   Expand is   engaged in the development of technology designed to accelerate   communications over diverse network infrastructures (including E1, T1 and   frame relay lines) and improve broadband efficiency.                            In June   2003, as part of a Capital raise from existing shareholders in Expand, the   Company invested an addition amount of $ 250,000 (NIS 1,084,000) in Expand.   During April 2005, the Company gave a bridging loan to Expand in the amount   of $ 150,000 (NIS 653,000).                        (c)   Mainsoft is   engaged in the development of software and tools for software developers.     12    OPHIRTECH LTD. NOTES TO FINANCIAL STATEMENTS (continued)                  NOTE 2   –   INVESTMENTS IN COMPANIES (continued):                       (d)   Netformx is   engaged in development, marketing and support of software designed for   planning, operation and maintenance of computer networks.                            The   investment in Netformx as of December 31, 2005 is presented net of a provision   of NIS 7.6 million for impairment of value.                            Netformx is   partly held by companies which are related parties.                        (e)   StoreAge is   engaged in the development and marketing of a software solution and   innovative data storage solutions for communications networks (Storage Area   Network).                           During   February 2005, the company gave a bridging loan to Storeage ,in the amount of   $ 150,000 (NIS 653,000).                            StoreAge is   partly held by a company which is related party.                        (f)   Celvibe   develops solutions for digital video transmission for Internet broadband   networks and mobile phone communications.                           In November   2002, Celvibe ceased its operations and entered a winding-up procedure.                            On December   7, 2004, an amount of $ 393,000 was received from Celvibe’s liquidator, and On   June 30, 2005, an amount of $ 245,000 was received.                            As of   December 31, 2005, the balance of the investment is set at zero and the   company is not expecting to receive an additional amounts from the   liquidation of Celvibe.                        (g)   Viola is   engaged in the development of a software system to allow quick and   uninterrupted identifications of problems and technical difficulties on   various communications networks.                           In October   2003, the Company invested $ 150,000 (NIS 668,000) in Viola.                            The   investment in Viola as of December 31, 2005 is presented net of a provision   of NIS 8 million for impairment of value.                        (h)   Cerel   develops ceramic layering technologies for the passive electronic components   market.                           In 2002, the   company recorded an impairment provision of NIS 980,000 in respect of the   investment. In 2005, due to adverse indicators, the company wrote off the   balance of its investment in Cerel and recorded an impairment loss of NIS 3.3   million.     13    OPHIRTECH LTD. NOTES TO FINANCIAL STATEMENTS (continued)                      NOTE 2   –   INVESTMENTS IN COMPANIES (continued):                       (i)   Following is   a list of the companies in which the Company has invested approximately NIS   58 million. An impairment provision has been made for the full amount   invested:                                   Cipheractive   Ltd;                 Carmel   Biosensors Ltd;                 Elpas   Electro-Optic Systems Ltd                 Romidot Ltd;                 RealM   Technologies Ltd;                 Camelot   Information Technologies Ltd;                 Interlink   Computer Communications Ltd;                 Techimage   Ltd;                 Indox online   ltd.                 Iradius.Com,   Inc;                 Trans4u Ltd;                 Praxell Inc;                 Electrochemical   Light Switch Inc;                       NOTE 3   –   SHAREHOLDERS’ EQUITY:                        a.   Share capital                            The share   capital as of December 31, 2005 and 2004 is composed of ordinary shares of   NIS 1 par value, as follows: authorized - 10,000 shares; issued and paid -   1,000 shares.                       b.   Receipts on account of shares to be allotted                            On November   1, 2000, the Company received a payment on account of shares in the amount of   NIS 137,622,000 from its shareholders. The shares have not yet been allotted.                      NOTE 4   –   TAXES ON INCOME:                        a.   Measurement   of results for tax purposes under the Income Tax (Inflationary Adjustments)   Law, 1985 (hereinafter - the “Inflationary Adjustments Law”)                            Under the   Inflationary Adjustments Law, results for tax purposes are measured in real   terms, having regard to the changes in the Israeli CPI. The Company is taxed   under this law.                       b.   Taxes rates                            The income   of the company is taxed at the regular rate. Through December 31, 2003, the   corporate tax was 36%. In July 2004, Amendment No. 140 to the Income Tax   Ordinance was enacted. One of the provisions of this amendment is that the   corporate tax rate is to be gradually reduced from 36% to 30%. In August   2005, a further amendment (No. 147) was published, which makes a further   revision to the corporate tax rates prescribed by Amendment No. 140. As a   result of the aforementioned amendments, the corporate tax rates for 2004 and   thereafter are as follows: 2004 – 35%, 2005 – 34%, 2006 – 31%, 2007 – 29%,   2008 – 27%, 2009 – 26% and for 2010 and thereafter – 25%.     14    OPHIRTECH LTD. NOTES TO FINANCIAL STATEMENTS (continued)                  NOTE 4   –   TAXES ON INCOME (continued):                       c.   Losses for tax purposes, carried forward to future years                            Carryforward   losses aggregate approximately NIS 2 million at December 31, 2005. Under the   Inflationary Adjustments Law such carryforward tax losses are linked to the   Israeli CPI. No deferred tax asset has been included in respect of such   losses. In addition, no deferred tax asset has been included in respect of   the impairment provision created for the investments in companies.                        d.   Tax assessments                            The company   has received final tax assessments through tax year 2001.                    NOTE 5   –   “RELATED PARTIES” - TRANSACTIONS AND BALANCES:                        a.   Transactions:                                                                       2005       2004       2003                                                        NIS in thousands                                  Financial expenses in respect of short term   loan from a company which is a related party           194                       165                                                                            b.   Balances:                                                                  December 31                                                  2005       2004                                                         NIS in thousands                                                                                1)   Short-term loan from a company which is a   related party           (8,306   )       (8,114   )                                               2)   Current liabilities - presented in the   balance sheets as short-term credit from shareholders’           (4,125   )       (4,267   )                                                                NOTE 6   –   SUPPLEMENTARY FINANCIAL STAEMENT INFORMATION:                           Balance sheets:                           a.   Short-term bank credit:                                1)   Short-term   bank credit was unlinked and beared annual interest rate of 5.46% in 2005 and   6.5% in 2004. During October 2005, the company had settled the bank credit in   full.                                2)   In February   2001, the Company and its shareholders gave a commitment to a certain bank   that the Company would not make any repayments or settlements to its   shareholders on account of shareholders’ loans and/or sums received on   account of shares up to an amount of approximately adjusted NIS 100 million.                            b.   Short-term loan from a related party                                The loan is   linked to the Israeli CPI and bears no interest.    15    OPHIRTECH LTD. NOTES TO FINANCIAL STATEMENTS (continued)                  NOTE 6   –   SUPPLEMENTARY FINANCIAL STAEMENT INFORMATION (continued):                       c.   Concentrations of credit risks                            The   Company’s cash at December 31, 2005 and 2004 were deposited with Israeli   banks. The Company is of the opinion that the credit risk in respect of these   balances is remote.                        d.   Fair value of financial instruments                            The fair   value of the financial instruments included in working capital of the Company   is usually identical or close to their carrying value.                        Statements of operations -                        e.   General and administrative expenses:                                                                       2005       2004       2003                                                        NIS in thousands                                  Professional   fees           24                                           Travel   abroad           12                                           Payroll and   related expenses                                   187                   Office rent   and maintenance                                   22                   Other           (2   )       3           42                                                                     34           3           251                                                    16    OPHIRTECH LTD. NOTES TO FINANCIAL STATEMENTS (continued)                      NOTE 7   –   EFFECT OF   MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN   ISRAEL AND IN THE U.S.A:                            a.   General:                                1)   The Company   prepares its financial statements in accordance with Israeli GAAP. As   applicable to these financial statements, Israeli GAAP and U.S. of America   GAAP vary in certain significant respects, as described below:                                2)   Effect of   inflation                                    In   accordance with Israeli GAAP, through December 31, 2003, the Company   comprehensively included the effect of the changes in the general purchasing   power of Israeli currency in these financial statements, as described in note   1b. In view of the past inflation in Israel, this was considered a more   meaningful presentation than financial reporting based on historical cost.                                    Under US   GAAP Israel is not considered to be a highly inflationary country, thus the   measurement currency should be in nominal NIS.The adjustments to reflect the   changes in the general purchasing power of Israeli currency have been   reversed in the reconciliation of Israeli GAAP to U.S. GAAP.     17    OPHIRTECH LTD. NOTES TO FINANCIAL STATEMENTS (continued)                      NOTE 8   –   EFFECT OF   MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN   ISRAEL AND IN THE U.S.A (continued):                           b.   The effect   of the material GAAP differences, as described in a. above, on the   consolidated financial statements is as follows:                                1)   Operating   results:                                                                       2005       2004       2003                                                        NIS in thousands                                        Net losses as reported in these financial   statements according to Israeli GAAP)           2,996           142           1,908             Effect of the treatment of the following   item under U.S. GAAP-                                                 Reversal of the adjustment due to effect of   inflation           (50   )       -,-           (371   )                                                     Net losses under U.S. GAAP           2,946           142           1,537                                                                                  2)   Shareholders’   equity:                                                                      December 31,                                                  2005       2004                                                         NIS in thousands                                                Shareholders’ equity, as reported in these   financial statements, according to Israeli GAAP           20,557           23,553                 Effect of the treatment of the above   differences under U.S. GAAP:                                         Reversal of the adjustment due To effect of   inflation, net           (2,006   )       (2,056   )             Transaction with related party           800           800                                                       Shareholders’ equity under U.S. GAAP           19,351           22,297                                                                                3)   The company   has no other comprehensive income (loss) components other than net loss for   the reported periods.                      18     REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM   TO THE SHAREHOLDERS   OF AM-HAL LTD.    We have audited the accompanying balance sheets of Am-Hal Ltd. (“the Company”) and the consolidated balance sheets of the Company and a consolidated partnership as of December 31, 2003 and 2002, and the related statements of operations, changes in shareholders’ deficiency and cash flows – of the Company and on a consolidated basis – for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.   We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.   In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position – of the Company and on a consolidated basis – as of December 31, 2003 and 2002, and the results of operations, changes in shareholders’ deficiency and cash flows – of the Company and on a consolidated basis – for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in Israel which, with respect to these financial statements, differ in certain respects from the accounting principles generally accepted in the United States of America. See Note 25 to the financial statements that describe the material differences.   As explained in Note 2B, these financial statements are presented in values adjusted for the changes in the general purchasing power of the Israeli currency, in accordance with pronouncements of the Institute of Certified Public Accountants in Israel.   Brightman Almagor & Co.   Certified Public Accountants   A member firm of Deloitte Touche Tohmatsu   Tel Aviv, February 15, 2004        INDEPENDENT AUDITORS’ SPECIAL REPORT   We have audited the balance sheets of Am-Hal Ltd. (“the Company”) and the consolidated balance sheets of the Company and a consolidated partnership as of December 31, 2003 and 2002, and the related statements of operations, changes in shareholders’ deficiency and cash flows – of the Company and on a consolidated basis – for each of the three years in the period ended December 31, 2003, and have issued our unqualified report thereon dated February 15, 2004. The aforementioned financial statements (not presented separately herein) were prepared in new Israeli shekels (NIS) on the historical cost basis, adjusted for changes in the general purchasing power of the NIS in accordance with standards established by the Institute of Certified Public Accountants in Israel.   As described in Note 2B, the accompanying Company and consolidated financial data in U.S. dollars as of the abovementioned dates and for the abovementioned years then ended were prepared on the basis of financial data in nominal NIS (the basis on which the Company and consolidated adjusted NIS financial statements were also prepared), translated into US dollars in accordance with the principles described in Note 2B.   In our opinion, the accompanying financial data in US dollars was translated in accordance with the principles described in Note 2B.   This report is intended solely for the information and use of the Boards of Directors and management of the Company and Ampal-American Israel Corp., and should not be used for any other purpose.  Brightman Almagor & Co. Certified Public Accountants A member firm of Deloitte Touche Tohmatsu   Tel Aviv, February 15, 2004        INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF   BAY HEART LTD. AND SUBSIDIARY    We have audited the accompanying balance sheets of Bay Heart Ltd. (“the Company”) as of December 31, 2005 and 2004, and the consolidated balance sheets as of those dates, and the related statements of operations, changes in shareholders’ deficiency and cash flows – of the Company and on a consolidated basis – for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.   We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.   In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position – of the Company and on a consolidated basis – as of December 31, 2005 and 2004, and the results of operations, changes in shareholders’ deficiency and cash flows – of the Company and on a consolidated basis – for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in Israel.   Accounting principles generally accepted in Israel differ in certain respects from accounting principles generally accepted in the United States. With respect to these financial statements, the difference in the application of the latter is described in Note 19.   As described in Note 2A, the financial statements are presented in reported amounts, in conformity with Accounting Standards of the Israel Accounting Standards Board.   The condensed consolidated financial information in U.S. dollars presented in Note 18 to the financial statements, prepared at the request of an investor, represents a translation of the Company’s financial statements in nominal values, as stated in Note 18A. In our opinion, such translation into U.S. dollars was appropriately performed on the basis stated in Note 18A.        As described in Note 1C to the financial statements regarding the Company’s business condition, the Company has ongoing losses, a working-capital deficit, shareholders’ deficiency and negative cash flows from operating activities. As stated in that note, the continuance of the Company’s operations and its ability to satisfy its short-term liabilities is contingent upon the attainment of financing from the shareholders and/or bank financing arrangements. The Company’s management is currently negotiating with a bank for rescheduling its short-term credit as a long-term loan.  Brightman Almagor & Co. Certified Public Accountants Member firm of Deloitte Touche Tohmatsu  Haifa, Israel, February 22, 2006.         REPORT OF INDEPENDENT PUBLIC ACCOUNTING FIRM   To the Shareholders of   CARMEL CONTAINER SYSTEMS LTD.           We have audited the accompanying balance sheets of Carmel Container Systems Ltd. (“the Company”) as of December 31, 2005 and 2004, and the consolidated balance sheets as of such dates and the related statements of operations, changes in shareholders’ equity and cash flows – Company and consolidated – for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s board of directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.           We did not audit the financial statements of a certain subsidiary, whose assets constitute approximately 10% and 8% of total consolidated assets as of December 31, 2005 and 2004, respectively, and whose revenues included in consolidation constitute approximately 10%, 9% and 8% of total consolidated revenues for the years ended December 31, 2005, 2004 and 2003, respectively. The financial statements of those companies were audited by other auditors, whose reports have been furnished to us, and our opinion, insofar as it relates to amounts included for those companies, is based on the reports of the other auditors.           We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the company’s internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.   In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of  the Company and its subsidiaries as of December 31, 2005 and 2004, and the consolidated results of their operations and cash flows for each of the three years in the period ended of December 31, 2005, in conformity with Israel generally accepted accounting principles, which differ in certain respects from those followed in the United States, as described in Note 22 to the consolidated financial statements.                   Haifa, Israel, KOST FORER GABBAY & KASIERER  March 6, 2006 A Member of Ernst & Young Global         Report of Independent Registered Public Accounting Firm    To the shareholders of   C.D. PACKAGING SYSTEMS LTD.   We have audited the financial statements of C.D. Packaging Systems Ltd. (hereafter – the Company) and the consolidated financial statements of the Company and its consolidated subsidiary: balance sheets as of December 31, 2005 and 2004 and statements of income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s board of directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.   We conducted our audits in accordance with auditing standards generally accepted in Israel and in the standards of the Public Company Accounting Oversight Board (United States), including those prescribed by the Israeli Auditors (Mode of Performance) Regulations, 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the company’s Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.   In our opinion, the aforementioned financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2005 and 2004 and the results of operations, changes in shareholders’ equity and cash flows – of the Company and consolidated – for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted (“GAAP”) in Israel. Also, in our opinion, except for failure to meet the requirements of the Securities Regulations (Presentation of Transactions between a Corporation and its Controlling Shareholder in the Financial Statements), 1996, as explained in note 11, and except for the exclusion of certain specifications, as explained in that note, the abovementioned financial statements have been prepared in accordance with the Securities (Preparation of Annual Financial Statements) Regulations, 1993.   As explained in note 1b, the financial statements, as of dates and for reporting periods subsequent to December 31, 2003, are presented in new Israeli shekels, in conformity with accounting standards issued by the Israel Accounting Standards Board. The financial statements as of dates and for reporting periods ended prior to, or on, the above date are presented in values that have been adjusted for the changes in the general purchasing power of the Israeli currency through that date, in accordance with pronouncements of the Institute of Certified Public Accountants in Israel.   Haifa,      March 6, 2006 /s/ KESSELMAN & KESSELMAN CPAs (ISR) A member of pricewaterhouseCoopers International Limited        CORAL WORLD INTERNATIONAL LTD.   REPORT OF INDEPENDENT AUDITORS  TO THE SHAREHOLDERS  OF CORAL WORLD INTERNATIONAL LTD.   We have audited the accompanying consolidated balance sheets of “Coral World International Ltd.” (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Board of Directors and management of the Company. Our responsibility is to express an opinion on these financial statements based on our audits.   We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB) (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by the Board of Directors and management of the Company, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.   In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Coral World International Ltd. as of December 31, 2005 and 2004, and the results of its operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.                     Fahn Kanne & Co.    Certified Public Accountants (Isr.)   Tel-Aviv, Israel, March 26, 2006        REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   To the shareholders of   EPSILON INVESTMENT HOUSE LTD.           We have audited the balance sheets of Epsilon Investment House Ltd.  (“the Company”) as of December 31, 2004 and 2003, and the consolidated balance sheets as of such date and the related statements of income, changes in shareholders’ equity and cash flows – Company and consolidated – for the years then ended expressed in New Israeli Shekels (not presented herein). These financial statements are the responsibility of the Company’s board of directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of an investee company have been audited by other auditors whose report has been furnished to us; insofar as our opinion on the consolidated financial statements relates to the amounts included for the investee, it is based solely on their report. In the consolidated financial statements, the Company’s investment in the investee is stated at NIS 331 thousand and NIS 26 thousand, respectively, at December 31, 2004 and 2003, and the Company’s equity in the net income of the investee is stated at NIS 305 thousand and NIS 25 thousand for the years then ended.           We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in Israel, including those prescribed by the Auditors’ Regulations (Auditor’s Mode of Performance)-1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by the board of directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.           In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position – of the Company and consolidated – as of December 31, 2004 and 2003, and the results of operations, changes in shareholders’ equity and cash flows – of the Company and consolidated – for the years then ended, in conformity with generally accepted accounting principles in Israel, which differ in certain respects from those generally accepted in the United States (see Note 20 to the financial statements).           As described in Note 2a, the financial statements as of the dates and for the reported periods subsequent to December 31, 2003, are presented in reported amounts, in conformity with Accounting Standards of the Israeli Accounting Standards Board. The financial statements as of the dates and for the reported periods until the aforementioned date are presented in values that were adjusted until that date according to the changes in the general purchasing power of the Israeli currency, in accordance with pronouncements of the Institute of Certified Public Accountants in Israel.                     Tel-Aviv, Israel KOST FORER GABBAY & KASIERER  February 24 , 2005 A Member of Ernst & Young Global         REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   To the shareholders of   Hod Hasharon Sport Center Limited   We have audited the consolidated balance sheets of Hod Hasharon Sport Center Limited and its subsidiaries as of December 31, 2005 and 2004 and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.   We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States of America) and with auditing standards generally accepted in Israel, including those prescribed by the Israeli Auditors (Mode of Performance) Regulations, 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company’s Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.   In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2005 and 2004 and the consolidated results of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.  Somekh Chaikin Certified Public Accountants (Isr)  February 28, 2006        REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   To the shareholders of   Hod Hasharon Sport Center (1992) Limited Partnership   We have audited the consolidated balance sheets of Hod Hasharon Sport Center (1992) Limited Partnership and its subsidiaries as of December 31, 2005 and 2004 and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.   We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States of America) and with auditing standards generally accepted in Israel, including those prescribed by the Israeli Auditors (Mode of Performance) Regulations, 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company’s Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.   In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2005 and 2004 and the consolidated results of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.  Somekh Chaikin Certified Public Accountants (Isr)  February 28, 2006        REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   To the shareholders of   RENAISSANCE INVESTMENT COMPANY LTD.           We have audited the balance sheets of Renaissance Investment Company Ltd. (“the Company”) as of December 31, 2004 and 2003, and the consolidated balance sheet as of December 31, 2004, and the related statements of income, changes in shareholders’ equity and cash flows of the Company for the years ended December 31, 2004 and 2003 and the consolidated statements of income and cash flows for the year ended December 31, 2004, expressed in New Israeli Shekels (not presented herein). These financial statements are the responsibility of the Company’s board of directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of an investee company have been audited by other auditors whose report has been furnished to us; insofar as our opinion on the financial statements relates to the amounts included for the investee, it is based solely on their report. In the financial statements, the Company’s investment in the investee is stated at NIS 3,571 thousand and NIS 1,070 thousand, respectively, at December 31, 2004 and 2003, and the Company’s equity in the net income of the investee is stated at NIS 501 thousand and NIS 70 thousand for the years then ended.           We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in Israel, including those prescribed by the Auditors’ Regulations (Auditor’s Mode of Performance)-1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by the board of directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.           In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2004 and 2003, and the consolidated financial position as of December 31, 2004 and the results of operations, changes in shareholders’ equity and cash flows of the Company for the years ended December 31, 2004 and 2003 and the consolidated results of operations and cash flows for the year ended December 31, 2004, in conformity with generally accepted accounting principles in Israel, which differ in certain respects from those generally accepted in the United States (see Note 15 to the financial statements).           As described in Note 2a, the financial statements as of the dates and for the reported periods subsequent to December 31, 2003, are presented in reported amounts, in conformity with Accounting Standards of the Israeli Accounting Standards Board. The financial statements as of the dates and for the reported periods until the aforementioned date are presented in values that were adjusted until that date according to the changes in the general purchasing power of the Israeli currency, in accordance with pronouncements of the Institute of Certified Public Accountants in Israel.                   Tel-Aviv, Israel KOST FORER GABBAY & KASIERER  February 24 , 2005 A Member of Ernst & Young Global            GRAPHIC 2 ampal.jpg GRAPHIC  begin 644 ampal.jpg M_]C_X``02D9)1@`!`0$!+`$L``#_VP!#``@&!@<&!0@'!P<)"0@*#!0-#`L+ M#!D2$P\4'1H?'AT:'!P@)"XG("(L(QP<*#7J#A(6&AXB)BI*3E)66EYB9FJ*CI*6FIZBIJK*SM+6VM[BYNL+#Q,7& MQ\C)RM+3U-76U]C9VN'BX^3EYN?HZ>KQ\O/T]?;W^/GZ_\0`'P$``P$!`0$! M`0$!`0````````$"`P0%!@<("0H+_\0`M1$``@$"!`0#!`<%!`0``0)W``$" M`Q$$!2$Q!A)!40=A<1,B,H$(%$*1H;'!"2,S4O`58G+1"A8D-.$E\1<8&1HF M)R@I*C4V-S@Y.D-$149'2$E*4U155E=865IC9&5F9VAI:G-T=79W>'EZ@H.$ MA8:'B(F*DI.4E9:7F)F:HJ.DI::GJ*FJLK.TM;:WN+FZPL/$Q<;'R,G*TM/4 MU=;7V-G:XN/DY>;GZ.GJ\O/T]?;W^/GZ_]H`#`,!``(1`Q$`/P#W^BBB@`HH MHH`**CEE2")Y9&"1QJ69CT`')-?+E_\`$WQ5O>'[^;5+Z6[GCNMJM(02J[!_7-> MDUG4@X2<7T+A)2BI(****@H****`"BBB@`HHHH`****`"BBB@`HHHH`***\M M^,_B;4_#UEI":7?2VDMQ)*7:,X+*H7CI_M5=.FZDE%$SDH1YF>I45\\?#GQC MXHUOQ[IEC=ZS=36SL[2HQX(5&;GCU`KZ'JZU%TIQ4_P"%>IZGJ=GHVG2Z MAJ$ZP6L0!DD8$A50*>-Q'+'&^*?A70+YK*>\DN+A#B1+6/>$/H M3P,^VN#U'N*Y+XD^$?#VF?#.\:TTVVMW MLQ$89DC&_)=5Y;JV=QSGUS7BG@S59M&\8Z5>0L1MN41P/XD8[6'X@FBGAZ=6 MFY1O=!.M.$TI;'U-K6OZ7X=LTN]6NUM8'D$:NRDY8@G'`/8&LFS^(OA/4;V" MSM-9CEN)W$<<8C?+,3@#[MO(?"UZVG>)[& M\CA,\\3EH(@,[Y<'RQ^+;:*.%C.ESMZA4Q#C4Y4?3OB/QOH'A4JFJ7X2=QE8 M(U+R$>N!T'N<51\._$OPUXFO19V=U)#=M]R&X387_P!WJ"?;.:B\/_#S3;?3 M)I->MX=4UB_4M?7,ZASN/\*9^Z!T!&.F?0#YQU>RF\.^)[RSAE=9;"[9(Y0< M-\K?*WZ`TJ-"E5O%/5!4JU(6;6A]B4QV6-&=CA5!)/M6-X0UP>(_">G:J2/, MGA'FX&`)!\KX'^\#6V1G@UQ-.+LSI3NKHX.?XO>%8%$A>_,+'Y)1:.$?Z$XJ MQI/Q5\(:O=+;1ZF8)6.%%S&8PW_`CQ^M==6LEK)U!5AZ$5 M\E>,='BT#Q?JFF0$^1!.1'DY(0C;'_LE=A\%==N]6\(S6EX[2M83"*)V.3Y9&0#].1],5 MYM\:[GS_`(AR1YSY%M%']."W_LU/#4W#$*UMI;B=@D42%W7QE\4-1\3W2$Q6[-,H;D!WRL:_@H/\` MWR*P/C*C)\2+QCT>*)A]-@']*]C^%?AP^'O!-J)4VW5Y_I4V>HW`;1^"XX]< MUY'\:T9/B$['HUK$PY[C1FI8AVV2LNU"/_`&>L/X`R`:GKF`S?XU)\ M?[G=>Z':`_UDQ_Q[P2R_\`CI7_`-FKZ69@%))``Y)/05GC MY7J)>1>$7N-GR1XVNOMGCG7)LY!O95!]E8@?H*]B^!.E);^&+[4RH\ZZN?+! M_P!A`,?JS?I7@M[<&[OKBY/_`"UE:0Y]SFOISX3VWV7X:Z2",-())3[YD8C] M,5T8Q\M%1,<-[U5LS_C5=>1\/)8R?]?4GTVQL?Y M@48;W<.WZA7UK)>AU?Q]N=VNZ1:Y_P!7;/)C_>;'_LE8?P9TR+4OB!%),N\6 M<#W(!Z;@0H/X%LU)\;+CS_B$\9.?(M8H_P`\M_[-6W\`K8MK6LW>.([=(L_[ MS$_^R4_@PGR_,/BQ'S/>*^5/B:BQ_$?6@I.#,&_$HI_K7U77RA\1YOM'Q$UQ M\YQ'+7[1JU_%;(?NJQRS_P"ZHY/X"L,0FZTD MC6B_W:;-4D*"2<`=S7R/XWU2+6O&NKW\+!H9+AA&PZ,J_*#^(`->A^)?B/JW MCVY_X1OPC97"17'RR2GB21.^<<(G/))Y]NA\AGB-OX5%_P`37E/Q,NOM?Q'UN7/2 M<1?]\*J?^RU[?\';7[/\-[!R,&>260_]]E?_`&45\\>([K[;XHU:ZR#YUY-( M.>QO7J\Y^"=MY'P]2 M7'_'Q=2R_P`E_P#9:]&K@Q+O5D=5%6IH****P-0HHHH`*\(O5/Q-^,GV89?1 M],.UR#E2B'YO^^WX^GTKT'XG>*QX6\)3&&3;?WN8+8`\J2/F%/_";6+$':=.0`^_F29_G58)_O2<3_ M``RS\!)`/$6JQ8^]:*V?HX_QJE\=+@3>.8(1TAL44_4LY_D14WP&DQXQU"/' MWM/9LY])(_\`&L#XL7(NOB5JQ!RL9CC'X1KG]9T?P% MM=_BC4[HCB*S\O/H6=3_`.RU[;XBN/L?AG5;KH8;.:3/IA"?Z5Y7\`+;;::Y M=$??DAB!_P!T,3_Z$*[OXEW7V3XQ%O0Z*/NT;^ MI\J5]=>#;86?@K1(`,%;&$L/]HH"?U)KY&1&DD5$&68@`>IK[0MX%M;6*!/N M1($'T`Q6^8/2*,L&M6SQ#X_7.[4]$M<_ZN&63'^\5'_LE8WP.M?/\>R38_X] M[*1\GU)5?_9C1\<;DS^/8XL\6]E&F/0EF;_V85L?`&VW:IK5UC_5PQ1Y_P!Y MF/\`[)5_#A/E^9/Q8@XKXFW/VOXCZW)G.V81_P#?"JO_`++7I?P"M@FC:S=8 MYDN(X\_[JD_^SUXWXENOMOBC5KK.?.O9G!]BY->^?!*V\CX?B3'_`!\7]73=& MOKXG`MK>27/^ZI/]*^-JSR]?$R\8]D>W^$/$D/@;X+IJ;JKW-W(4:>:2\U&]E6--QZDG``[`#\A6[X^DEM%T'0&R% MTW38RZ'M+*-[G]5'X5K?!/3$OO'GVJ1KU_ MR,FW.2I]$>R>%O"6F^`O#THMT62Z6(R7-RP^:4@9_!1V']:^5"Q9BS$DGDD] MS7UQXVN?L?@;7)\X(L90#[E2!^IKY'K+`MRYI2ZEXJRY8H^K/!:C2OAGI,C` M!8]/6X/XKO/\Z^4RQ9BS$DGDD]S7U;XB_P")/\,-0C^Z8-*:$>Q\O:/UQ7RE M3P6O/+NQ8K3EB?5/PSMOLOPXT2+INA,G_?;,W_LU==65X;MC9>%])M2,&&RA MC(^B`5JUYE1WFV=T5:*04445`PJ"[NH+&TFNKJ58H(4+R2,/9/$M]"RZ!IS;+2*0<2 M%3D#'U^9OP'(KV>N%T[Q_P"!M)T^"PL;QX;:!0B(MA<``?\`?OJ>I/>K7_"T M?!__`$$YO_`"X_\`C=55C4F](NRVT)@XQ6KU.PKY_P#CTI'BG3&P<&RP#[[V MKU#_`(6CX/\`^@G-_P"`%Q_\;KR3XNZY8>*-5TZ;1WFNHX8&61OL\B8);/\` M$HK3"4YQJIM6(Q$HNFTF'P+DV>.[A>N^PD4^WSH?Z5QWC.Y-YXWUN?.0U],` M?8.0/T%;_P`+=4A\->,1?:H);>U:W>-I/(=\$X(X4$]JY"ZAN[J[FN&MIMTK MLY^0]2<^GO7H1C^^E+R1R-_NTO,]^^!EMY/@:XF/6>^=@?8*@_F#5KXTW7V? MX>2QY_X^+F*/]2__`++63\.?&GASP[X&L-.U"]EAO$,C2H+.9L$NQ'(0CH16 M-\7/%VE^)M"L;'1IIKEDNO.E'V:5,`*0/O*,_>-<*A*6)YFM+G6Y15&U^AYA MX7M?MOBS1[8#/FWL*'Z%QFOL*OD[P.T6E^-=+OM326&SMYO,DD\EFQ@''`!/ M7':OH'_A:/@__H)S?^`%Q_\`&ZO'1E*2Y5NZDP^43X/OL3=C_QZO)O$\DVK>*M5U"&&9X;B[DDB M8Q,,H6.TX/MBO0O"?BC1]`^$NK:7<7$L>J7"7)6(VTA^9DVK\VW;V'4UM6B_ M8*"\C.G)>U.]*\)VD>BSS75UIWEK-#<);29@=@#)$P*C(W[B"N>M&,A*<$HBPTE&5 MV==\7=672_A[?(&Q+>,ML@]8);CC@1KRV? MKC'U(K:^)/BZZ\::M%]EL[F+3;4$0(\9#.3UY^@J(*5&A9+WF7)JK5WT1Q7Q?B=/B;JC,/ED6 M%E]QY2#^8-=-\`FC&LZRI)\PVZ%>>VXY_I57XLWOA_Q/+::KHMZ\U]$GDRPF MTF0R)G((+(!D$GJ>0?:N3\$Z_J'@[Q''J<=C--"RF*>+:070D9QQU!`(^E79 MSP_+UM^1-U&MS=#W?XMW8M/AMJ@SAYC'$OOEUS^@-?-NCVPO-;T^U(!$UQ'& M<^[`5Z7XZ\86WCK3)XE:YT^&S"R6MI+;NSW4Q."6*@JH5=P'/):O-])FGT?7 M-.U!K>7-M06XZRR*@_$X_K7M'Q4\::1XC\(0V&C3SW%PUTCR1FUE3" M!6[LH'7;WKRSPU$+3Q1I5S?1S1VD-W%),_E,<(K`G@#/0=JG"1<*3NM1XAJ5 M16/KM55$"J`%'``["G5Q_P#PM'P?_P!!.;_P`N/_`(W1_P`+1\'_`/03F_\` M`"X_^-UYGL:G\K^X[O:1[G845Q__``M'P?\`]!.;_P``+C_XW11[&I_*_N%S MQ[G84445F6%%%%`!1110`4444`%%%%`!1110`5Q'Q:NA;?#75<'#2^7$/?,B MY_3-=O7G?QEM-1U#P9#::;8W5W+)>(72WA:0A`K')"@\9V_G6M!7J1OW(J?` MSYPMX6N;F*!/O2.J#ZDX_K7VA&BQQJBC"J``/0"OEOPMX-\0_P#"6Z.;K0-4 MAMUO86EDELY%54#@DDD8''K7U/77CYIN*1SX2+2;84445YYUA1110`4444`% M%%%`!1110`4444`%%%%`!1110`4444`%%%%`!1110`4444`%%%%`!1110`44 944`%%%%`!1110`4444`%%%%`!1110!__V3\_ ` end    GRAPHIC 3 kpmg.jpg GRAPHIC  begin 644 kpmg.jpg M_]C_X``02D9)1@`!`0$!+`$L``#_VP!#``@&!@<&!0@'!P<)"0@*#!0-#`L+ M#!D2$P\4'1H?'AT:'!P@)"XG("(L(QP<*#7J#A(6&AXB)BI*3E)66EYB9FJ*CI*6FIZBIJK*SM+6VM[BYNL+#Q,7& MQ\C)RM+3U-76U]C9VN'BX^3EYN?HZ>KQ\O/T]?;W^/GZ_\0`'P$``P$!`0$! M`0$!`0````````$"`P0%!@<("0H+_\0`M1$``@$"!`0#!`<%!`0``0)W``$" M`Q$$!2$Q!A)!40=A<1,B,H$(%$*1H;'!"2,S4O`58G+1"A8D-.$E\1<8&1HF M)R@I*C4V-S@Y.D-$149'2$E*4U155E=865IC9&5F9VAI:G-T=79W>'EZ@H.$ MA8:'B(F*DI.4E9:7F)F:HJ.DI::GJ*FJLK.TM;:WN+FZPL/$Q<;'R,G*TM/4 MU=;7V-G:XN/DY>;GZ.GJ\O/T]?;W^/GZ_]H`#`,!``(1`Q$`/P#W^N:T.UU+ M4M`TV_F\1:B);FUBF<)%;!0S*"75 M(?$4>CC6[PQR&%_/,4'F`,ET2H_=[<9A0],]>>:V/[(OO^ACU3_OW;?_`!FO M/-;UCQ1!\2=%T:SMM*GUN?3X[N>20R);)L%TI`QEL?O",XY('`SQKZ'\0+\7 M7BNQ\1VMBEQX>A6XEETZ1GCD0H6*@,,Y&,?CC`QD@&KI,^IZQ969MT9[1KTP.O%6]4M=0TW39KQ-?U"1H0&"21V^UN1P<1`X^A% M<)\(/&C:[INN:MJJV]G%IUO!"[ID*(T\YRQR3_?/Y5%9_$S4_%%QK4,^EQ6& MA0::U^)I%=IECW#9OQ\H++EP`#\O3/6@#T#3H-0U2&>Z;7+Z#_2[F)8H8X-J MK',Z*!NB)Z*.I/-2O'?:=JFF*VKW=W'\4S22$QJJD+UVC=W'X#J].US_A)+#P MKJQLKBQ:XNI"UM<##QL(9E(]QD'!P,C!P.E`"?$G^UY?`][8Z';2SW]_MM$$ M:D[%F17$0>"M7\!?$#3IM!.H3:'J%K'9WTMK'&SPN@"K(5*E< M<*?9**`/'3\/-1\6_$G6]2U?4M>LK.SCCM;"ZA9()9ACYB"%QL!W= M`,[@?7-S7/ANMCH=CX6T1]0ELM5OXSJXN[S$:F[V1+A5PH^8R%F)`P".F<9FT_P1XD MU_PMXRO'N;O3-2UJ;R[>WN(8XRUO&`L:R84%,-/U:U/EQVL+)'9Q.\F9"9(Q\Z]2#G@'ZUZ_IWAQ[%--6;6-0O% 8L%'EK/Y9#-Y93)(3<3ACU8^^:W**`/_9 ` end    EX-10.L 4 exhibit_10l.htm           10-K       Exhibit 10.L      OMNIBUS AGREEMENT   among   MERHAV AMPAL ENERGY LIMITED   AND   MERHAV (M.N.F.) LIMITED   dated as of December 1, 2005          TABLE OF CONTENTS       Page(s)                       ARTICLE I DEFINITIONS 2          ARTICLE II TRANSACTIONS 5      2.1  Purchase of Initial Shares 5     2.2  Nominee Agreement 5     2.3  Purchase of Shares 5     2.4  Purchase Price Adjustment 6     2.5  Put Option 6             ARTICLE III SELLER'S REPRESENTATIONS AND WARRANTIES 7      3.1  Existence; Authority; Enforceability 7     3.2  The Shares 7     3.3  Absence of Conflicts 7     3.4  Compliance With Law; Consents 7     3.5  Fees 8     3.6  Disclosure 8             ARTICLE IV COVENANTS 8      4.1  Exclusivity 8     4.2  Tag Along 9     4.3  Due Diligence 9     4.4  Payment of Current Capital Call 9     4.5  Limitation on Certain Representations 9     4.6  Further Assurances 10             ARTICLE V SURVIVAL 10      5.1  Survival 10             ARTICLE VI MISCELLANEOUS 10      6.1  Governing Law 10     6.2  Arbitration 10     6.3  Severability 10     6.4  Interpretation 10     6.5  Costs and Expenses 11     6.6  Notices 11     6.7  Counterparts 12     6.8  Entire Agreement 12     6.9  No Third Party Rights; Assignment 12     6.10 Waivers and Amendments 12     ii     OMNIBUS AGREEMENT           OMNIBUS AGREEMENT (this “Agreement”), dated as of December 1, 2005, by and among Merhav (m.n.f) Limited, a company organized under the laws of the State of Israel (“Seller”), and Merhav Ampal Energy Limited, a company organized under the laws of the State of Israel (“Purchaser”) (each, a “Party” and, collectively, the “Parties”).   RECITALS           WHEREAS, Purchaser owns 15,000 shares (the “Shares”) of East Mediterranean Gas Co. S.A.E., an Egyptian stock company (“EMG”), representing 25% of the issued and outstanding capital stock of EMG;           WHEREAS, Seller offered Purchaser the opportunity to purchase all or part of the Shares;           WHEREAS, Purchaser requires additional time to complete due diligence with respect to EMG and Seller’s ownership of the Shares before making a final determination with respect to the purchase the Shares, and Seller and Purchaser need additional time to negotiate the price and terms of such a purchase;           WHEREAS, Seller has informed Purchaser that the shareholders of EMG are subject to a capital call (the “Current Capital Call”) pursuant to which Seller, to maintain its interest in EMG, will be required to contribute capital to EMG;           WHEREAS, Seller has informed Purchaser that it may seek other purchasers of the shares;           WHEREAS, after initial review, Purchaser has determined it is in its best interest to preserve the opportunity to purchase the Shares pending completion of its due diligence;           WHEREAS, to preserve the opportunity to purchase the Shares, Purchaser has agreed to purchase, and Seller has agreed to sell, the beneficial ownership in 1200 shares of EMG (such shares representing approximately 2% of the issued and outstanding capital stock of EMG) (the “Initial Shares”), while the Parties continue to negotiate an agreement to purchase the Shares;           WHEREAS, the purchase of the Initial Shares will be subject to (a) a downward purchase price adjustment based on any final negotiated purchase price for the Shares that is lower than the purchase price for the Initial Shares herein and (b) Purchaser’s right to cause under certain circumstances (including Purchaser not being satisfied with its due diligence) Seller to repurchase the Initial Shares; and           WHEREAS, the Parties will consummate certain additional transactions and enter into certain other Transaction Documents (as hereinafter defined) in connection herewith.           NOW, THEREFORE, in consideration of the aforesaid premises and of the mutual representations, warranties and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties hereby agree as follows:   1      ARTICLE I  DEFINITIONS           The following terms shall have the following meanings for purposes of this Agreement:           “Affiliate” means (i) with respect to any Person, a Person that controls, is controlled by, or is under common control with such Person (it being understood, that a Person shall be deemed to “control” another Person, for purposes of this definition, if such Person directly or indirectly has the power to direct or cause the direction of the management and policies of such other Person, whether through holding ownership interests in such other Person, through agreements or otherwise); and (ii) with respect to any natural Person, (1) any parent, grandparent, sibling, child or spouse of such natural Person, or other Person related by marriage to any such Persons, (2) any trust established for the benefit of such natural Person or any Affiliate of such natural Person or (3) any executor or administrator of the estate of such natural Person.           “Agreement” has the meaning set forth in the Preamble.           “Authority” means any governmental, judicial, legislative, executive, administrative or regulatory authority of Egypt, Israel, the United States or any state, local, provincial or foreign government or any subdivision, agency, commission, office or judicial, administrative or regulatory authority thereof.           “Business Day” means any day other than a Saturday, Sunday or a day on which banking institutions in New York, New York, Israel or Egypt are authorized or obligated by law or executive order to close.           “Charter Documents” means any by-laws, charter, memorandum, certificate of incorporation, articles of association and any other similar constitutive or governing documents.           “Consent” means any consent, waiver, approval, authorization, exemption, registration, permit, license or declaration of or by any Person or any Authority, or expiration or termination of any applicable waiting period under any Legal Requirement, that is required with respect to any Party in connection with (i) the execution and delivery of this Agreement or any other Transaction Document or (ii) the consummation and performance of any of the transactions provided for hereby or thereby.           “Contract” or “Contracts” means any and all contracts and agreements, including those that are franchises, warranties, understandings, arrangements, leases, licenses, registrations, authorizations, mortgages, bonds, notes and other instruments (whether written or oral).           “Current Capital Call” has the meaning set forth in the Recitals.           “Definitive Documentation” has the meaning set forth in Section 2.4.   2             “Initial Shares” has the meaning set forth in the Recitals.           “Definitive Per Share Purchase Price” has the meaning set forth in Section 2.4.           “EMG” has the meaning set forth in the Recitals.           “Initial Per Share Purchase Price” has the meaning set forth in Section 2.4.           “Judgments” means any and all judgments, orders, writs, directives, rulings, decisions, injunctions, decrees, settlement agreements or awards of any Authority or arbitrator.           “Legal Requirements” means any and all (i) laws, ordinances and regulations, whether federal, provincial, state or local, of Israel, Egypt, the United States, or any other applicable jurisdiction; (ii) codes, standards, rules, requirements and criteria issued under any laws, ordinances and regulations, whether federal, provincial, state or local of Israel, Egypt, the United States or any other applicable jurisdiction; and (iii) Judgments.           “Liabilities” means any obligation, liability, or indebtedness of any kind, character or description, whether absolute, contingent, accrued, liquidated, unliquidated, known, unknown, executory or otherwise.           “Lien” means any mortgage, pledge, hypothecation, charge, assignment, deposit arrangement, encumbrance, security interest, lien, fiduciary assignment and any security or similar agreement of any kind or nature whatsoever.           “Necessary Action” means, with respect to a result required to be caused, all actions (to the extent such actions are permitted by applicable Legal Requirements) reasonably necessary to cause such result.           “Nominee Agreement” means the Nominee Agreement, dated as of the date hereof, between Seller and Purchaser.           “Option Termination Date” has the meaning set forth in Section 2.3.           “Party” or “Parties” has the meaning set forth in the Preamble.           “Person” means an individual, corporation, partnership, trust, limited liability company, a branch of any legal entity, unincorporated organization, joint stock company, joint venture, association or other entity, or any government, or any agency or political subdivision thereof.           “Preamble” means the preamble to this Agreement.           “Proceeding” means any action, suit, charge, hearing, claim or legal, administrative, arbitration or other alternative dispute resolution proceeding or investigation.           “Pipeline” means the proposed pipeline to be built by EMG from El-Arish, Egypt to Ashkelon, Israel, and any future locations.           “Put” shall have the meaning set forth in Section 2.5.   3             “Put Closing” shall have the meaning set forth in Section 2.5.           “Put Notice” shall have the meaning set forth in Section 2.5.           “Put Price” means, with respect to any date of determination, the amount set forth in the following table and any amounts of additional capital calls (if any) contributed by Purchaser on account of the Initial Shares in accordance with the provisions of the Nominee Agreement:    On or Prior to: Amount               May 31, 2006 $30,377,500         November 30, 2006 $30,795,000         May 31, 2007 $31,212,500         November 30, 2007 $31,630,000         May 31, 2008 $32,047,500         November 30, 2008 $32,465,000            “Purchase Price” has the meaning set forth in Section 2.1.           “Purchaser” has the meaning set forth in the Preamble.           “Recitals” means the recitals to this Agreement.           “Sale Notice” has the meaning set forth in Section 4.2.           “Seller” has the meaning set forth in the Preamble.           “Shares” has the meaning set forth in the Recitals.           “Tag-Along Notice” has the meaning set forth in Section 4.2.           “Tag-Along Shares” has the meaning set forth in Section 4.2.           “Third-Party” has the meaning set forth in Section 4.2.           “Transaction Documents” means each of this Agreement, the Nominee Agreement and any other agreement, certificate or instrument delivered pursuant to any of the foregoing.           “Transfer” means, whether voluntary or involuntary, any transfer, assignment (including any fiduciary assignment), conveyance, sale, pledge or hypothecation.           “Transfer Instruments” has the meaning set forth in Section 2.1.           “Valuation Report” has the meaning set forth in Section 3.6.   4      ARTICLE II  TRANSACTIONS        2.1        Purchase of Initial Shares.           (a)        On the date hereof, Seller shall sell to Purchaser, and Purchaser shall purchase from Seller, the beneficial ownership in the Initial Shares, for the purchase price specified in Section 2.1(c). Seller shall deliver to Purchaser, against payment of the Purchase Price, such instruments of transfer (“Transfer Instruments”) reasonably requested by Purchaser to evidence the sale, transfer and assignment of the beneficial ownership of the Initial Shares from Seller to Purchaser. Any transfer or similar taxes shall be the responsibility of Seller. Except pursuant to Section 6 of the Nominee Agreement, or during the existence of a default by Seller in payment of the Put Price when due, the Purchaser hereby covenants and agrees not to seek or take any action to register the Initial Shares in its name on the registry of EMG.              (b)        The closing of the purchase and sale of the Shares (the “Closing”) shall take place on the date hereof at the offices of Seller, 33, Havazelet Hasharon St., Herzliya Pituah, Herzliya 46105, Israel.              (c)        The aggregate purchase price for the Initial Shares shall be $29,960,000 (the “Purchase Price”). The Purchase Price shall be paid on the date hereof by Purchaser to Seller, or to its order, by wire transfer of immediately available funds to an account or accounts of Seller at the bank or banks specified by Seller in writing. The Purchase Price is subject to adjustment in accordance with Section 2.4.           2.2        Nominee Agreement. Seller and Purchaser shall enter into the Nominee Agreement which shall set forth the agreements between the Parties with respect to, among other things, (i) Seller’s holding of the Initial Shares on behalf of and for the benefit of Purchaser; (ii) capital calls by EMG; (iii) voting of the Initial Shares; (iv) payment of dividends and other distributions from EMG; (v) Purchaser’s right to receive additional shares of EMG from Seller in consideration for Purchaser making certain capital contributions to EMG; and (vi) the transfer and registration of the Shares. Seller shall deal with the Initial Shares as provided in the Nominee Agreement.        2.3        Purchase of Shares. (a) The Parties hereby agree to use their good faith efforts to negotiate the terms and/or structure of, and Definitive Documentation relating to, the sale and purchase of the remaining Shares whether directly or by joint ownership of MAE, all as will be discussed and agreed between the Parties. Although the Parties hereby agree to enter into negotiations relating to the sale and purchase of the remaining Shares, the Parties acknowledge (i) that neither this Agreement, the Nominee Agreement nor any other Transaction Document bind the Parties to sell or purchase, as the case may be, the remaining Shares (except to the extent Purchaser has a right to additional Shares of EMG in connection with making of required capital contributions to EMG pursuant to a capital call) and (ii) that only the Definitive Documentation shall be binding on a Party with respect to either the sale or purchase of the remaining Shares. For the avoidance of doubt, this foregoing limitation on the binding nature of this Agreement applies only to this Section 2.3(a) and the obligation to either sell or purchase the remaining Shares, as the case may be, and not any other provision of this Agreement or the Transaction Documents.    5            (b)        The obligations of the Parties under this Section will terminate on the date (the “Option Termination Date”) which is the later of (x) December 1, 2006 or (y) the date on which EMG commences regularly scheduled deliveries of natural gas through the Pipeline.           2.4        Purchase Price Adjustment.           (a)        In the event that the Parties enter into a binding agreement for the purchase of the Shares pursuant to Section 2.3 above (the “Definitive Documentation”) and the purchase price per share for the Shares in the Definitive Documentation (the “Definitive Per Share Purchase Price”) is less than the purchase price per share paid for the Initial Shares (the “Initial Per Share Purchase Price”), the Initial Per Share Purchase Price shall be reduced to the Definitive Per Share Purchase Price. Upon closing of the sale and purchase of the Shares, Seller shall either, at its own discretion, (i) deliver to Purchaser an amount equal to the product of (x) the excess of the Initial Per Share Purchase Price over the Definitive Per Share Purchase Price multiplied by (y) 1200; or (ii) provide Purchaser with a notice according to which the amount specified in (i) above will be set off against payment of the consideration to Seller in the closing of the sale and purchase of the Shares pursuant to the Definitive Documentation. The parties acknowledge that the payment required hereunder may be paid by way of credit in connection with the purchase of the remaining Shares pursuant to the Definitive Documentation.           2.5        Put Option.           (a)        At any time after March 1, 2006 and prior to the Option Termination Date, Purchaser shall have the right for any reason whatsoever (including, without limitation, due diligence with respect to EMG or Seller’s ownership of the Shares) to require Seller to repurchase (the “Put”) all or any of the Initial Shares for the Put Price by delivering written notice of its exercise of such right to Seller (the “Put Notice”). For purposes of determining the Put Price, the determination date shall be the date on which the Put Closing occurs. Notwithstanding the foregoing, Purchaser may exercise the Put prior to March 1, 2006, if any representation or warranties of Seller herein are determined by Purchaser in its reasonable opinion not to be complete, accurate, and correct in all respects.              (b)        Seller will be obligated to purchase all of the Initial Shares requested to be repurchased in the Put Notice, at a mutually agreeable time and place which will in no event be later than forty-five (45) days after the date of the Put Notice (the “Put Closing”). At the Put Closing, Purchaser shall deliver to Seller such documentation reasonably requested by Seller and required to transfer to Seller Purchaser’s interest in the Initial Shares being repurchased by Seller, free and clear of any Liens attributable to Purchaser, and Seller shall deliver to Purchaser an amount equal to the quotient of (x) the Put Price divided by (y) the number of shares being repurchased by Seller.       6      ARTICLE III  SELLER’S REPRESENTATIONS AND WARRANTIES           Seller hereby represents and warrants to Purchaser on the date hereof:       3.1        Existence; Authority; Enforceability. Seller is a company duly organized and validly existing under the laws of Israel. EMG is a company duly organized and validly existing under the laws of Egypt. Seller has the requisite power and authority to enter into each Transaction Document to which it is a party and to perform its respective obligations thereunder. The execution, delivery and performance by Seller of each Transaction Document to which it will be a party and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized and approved by all corporate action of Seller. Seller has duly and validly executed and delivered each Transaction Document to which it is a party, and each such Transaction Document constitutes its legal, valid and binding obligation, enforceable against Seller, in accordance with its terms.        3.2        The Shares. (a) Seller owns 15,000 normal shares of stock, nominal value $1,000 per share, of EMG, representing 25% of all of the issued and outstanding capital stock or other equity interest of EMG on a fully-diluted basis. All of the issued and outstanding shares of capital stock of EMG have been duly authorized, validly issued and after payment of the Current Capital Call will be fully paid, nonassessable and except as set forth in EMG’s Charter Documents, free of preemptive rights, with no personal liability attaching to the ownership thereof. To the best of Seller’s knowledge, there are no outstanding securities convertible into, exchangeable for, or carrying the right to acquire, any capital stock of EMG, or subscriptions, warrants, options, calls, rights (pre-emptive or other) or other arrangements or commitments obligating EMG to issue or dispose of any of its capital stock or any ownership interest therein.           (b)        Seller is the record owner of the Shares, and except as set forth in EMG’s Charter Documents, free and clear of any and all Liens. Upon the delivery of the Transfer Instrument, Purchaser shall have good and valid beneficial ownership of the Initial Shares, free and clear of any Liens.           3.3        Absence of Conflicts. The execution and delivery by Seller of the Transaction Documents to which it is a party and the performance of its respective obligations hereunder and thereunder, and the consummation of the transactions contemplated hereby and thereby does not and will not conflict with, or result in the breach of any provision of, the Charter Documents of Seller or any Contract or violate any Legal Requirement applicable to Seller.        3.4        Compliance With Law; Consents. No Consent is required to be made or obtained by Seller in connection with (i) the execution, delivery or performance of the Transaction Documents to be entered into by Seller or (ii) the consummation of any of the transactions contemplated by the Transaction Documents. To the best of Seller’s knowledge, Seller is in compliance in all respects with all applicable Legal Requirements, except where such failure would not have or could not reasonably by expected to have a material adverse effect on Seller or its ability to consummate the transactions contemplated by, and perform its obligations, under the Transaction Documents.    7         3.5        Fees.           Neither Seller nor any of its Affiliates has paid or become obligated to pay any           fee or commission to any broker, finder or intermediary in connection with the           transactions contemplated hereby.        3.6        Disclosure.           Seller has provided to Purchaser all documents and information (i) in           Seller’s or any of its Affiliate’s possession relating to EMG, and           (ii) that is reasonably material in connection with a decision to purchase the           Initial Shares. Seller has not withheld from Purchaser or Giza Singer Even Ltd.           (“GSE”) (in connection with GSE’s engagement by Seller or its           Affiliates to prepare a valuation report of EMG) any information or documents           regarding Seller, its Affiliates or EMG, as the case may be, that are reasonably           material in connection with a decision to purchase the Initial Shares or in           determining the valuation of EMG. No representation or warranty by Seller           contained in this Agreement or any other Transaction Document and no information           contained in any other instrument furnished or to be furnished to Purchaser or           GSE, as the case may be, pursuant hereto or in connection with the transaction           contemplated by this Agreement, any other Transaction Document or in connection           with the Valuation Report (as defined below) contains or will contain any untrue           statement of a material fact or omits or will omit to state a material fact           necessary in order to make the statements contained herein or therein not           misleading. Seller is not aware of any facts or circumstances which would cause           the representations and warranties of Seller contained in this Agreement or any           other Transaction Documents to be untrue or incorrect. To the knowledge of           Seller, after due inquiry, there is no fact, circumstance or condition which has           had or could reasonably be expected to have a material adverse effect on EMG or           Seller, which has not been disclosed to Purchaser or its representatives.           Neither Seller nor any of its Affiliates are aware of any untrue statement of           material fact in the draft Economic Valuation, dated November 11, 2005, prepared           by GSE (the “Valuation Report”). Seller believes that the           assumptions made by GSE set forth in the Valuation Report are reasonable.     ARTICLE IV  COVENANTS       4.1        Exclusivity.           (a) During the period from the date hereof through the one year anniversary of           the date hereof, Seller shall not, and shall cause its Affiliates and agents,           directly or indirectly, not to (i) solicit, initiate or encourage any inquiries,           discussions or proposals from any other Person relating to a possible           acquisition of any part of the Shares; (ii) continue, solicit, encourage or           enter into negotiations or discussions relating to any such possible           acquisition; (iii) furnish to any other Person any information (not already           in the public domain) relating to the transactions contemplated hereby; or (iv)           enter into or consummate any agreement or understanding providing for any such           possible acquisition. To the extent Seller or any of its Affiliates is contacted           or solicited in writing by any Person in connection with the purchase of Shares,           Seller shall notify Purchaser in writing of any such written proposal or offer,           or any inquiry or other contact with any Person with respect thereto, in each           case promptly after such proposal, offer, inquiry or contact is made and shall,           in any such notice to Purchaser, indicate in reasonable detail the identity of           the Person making such proposal, offer inquiry or contact and the terms and           conditions of such proposal, offer, inquiry or other contact.    8            (b)        Notwithstanding the foregoing, the restriction on Seller set forth in Section 4.1(a) shall apply only with respect to 10,013 of the remaining Shares.           4.2        Tag Along. (a) In the event, Seller wishes to Transfer all or a portion of the Shares to a non-Affiliated third-party purchaser (a “Third-Party”), Seller shall provide Purchaser with a notice, via facsimile, describing the proposed sale to such Third-Party Purchaser, including the name of the Third-Party, the purchase price and the other material terms and conditions on which such Third-Party is willing to acquire the Shares (the “Sale Notice”), and Purchaser shall have the right, but not the obligation, to require Seller to include a pro rata portion of shares of EMG beneficially owned by Purchaser in such sale, on the same terms and conditions as apply to the Shares to be sold by Seller, by delivering written notice (a “Tag-Along Notice”) to Seller, via facsimile, within five (5) Business Days after receiving the Sale Notice, of its intent to exercise such right. The Tag-Along Notice shall specify the number of Initial Shares to be included in the proposed sale (the “Tag-Along Shares”). If Purchaser has not timely delivered the Tag-Along Notice, Seller shall be entitled to consummate the sale to the Third-Party on the terms described in the Sale Notice. In the event that the Third-Party is not willing to purchase all of the Shares offered by Seller and all of the Tag-Along Shares, each of Seller and Purchaser shall be entitled to include in such sale a pro rata portion of the shares held or beneficially owned by it.            (b)        In the event Purchaser has timely delivered the Tag-Along Notice, if Seller is           able to effect a sale of such shares which complies with Section 4.2(a) above,           then Seller shall arrange for the consideration to be paid by the Third-Party           for the shares to be sold by Purchaser to be transferred directly to Purchaser           upon delivery by Purchaser of appropriate documentation Transferring its           interest in the Tag Along Shares. All costs and expenses incurred by Seller and           Purchaser in connection with such sale shall be borne by such Seller and           Purchaser, respectively.           4.3        Due Diligence. Seller hereby agrees to cooperate with Purchaser in its due diligence and shall provide Purchaser with such information and documents as Purchaser shall reasonably request, and use reasonable commercial efforts to cause EMG to provide such information and documents as Purchaser shall reasonably request. The Parties agree that the due diligence to be conducted by Purchaser shall be to assist Purchaser (i) in confirming the representations and warranties of Seller set forth in this Agreement, and (ii) determining whether to exercise its Put and (iii) evaluating whether or not to purchase the remaining Shares.        4.4        Payment of Current Capital Call. Seller hereby undertakes to make the payment of any funds due to EMG pursuant to the Current Capital Call.        4.5        Limitation on Certain Representations. Notwithstanding anything to the contrary in Section 3.1, 3.3 and 3.4 above, it is agreed between the Parties that in the event that any representation or warranty given by Seller under Sections 3.1, 3.3 and/or 3.4 above, is determined to be inaccurate or incorrect, solely due to reasons attributable to the applicable laws and regulations of Egypt and/or EMG’s Charter Documents, then Purchaser’s sole and exclusive remedy will be to immediately exercise the Put Option as per the provisions of Section 2.5 above, and if such exercise of the Put Option is impossible for any reason whatsoever (including a determination that due to applicable law, the transfer of the beneficial ownership of the Initial Shares to Purchaser was invalid or unenforceable), then to receive an amount which is equal to the relevant Put Price applicable at that time, no later than forty-five (45) days after the date on which Seller will receive a notice, in writing, from Purchaser to that effect, against delivery of the documents evidencing the transfer of any rights Purchaser may have in the Initial Shares to Seller in accordance with Section 2.5(b).    9         4.6        Further Assurances. Subject to the terms and conditions herein, each of the Parties agrees to take, or use reasonable commercial efforts in order to cause to be taken, all Necessary Actions and to do, or use reasonable commercial efforts in order to cause to be done, all things necessary, proper or advisable under all applicable Legal Requirements to consummate and make effective the transactions contemplated by the Transaction Documents to which it is a party.     ARTICLE V  SURVIVAL       5.1        Survival.           Each representation and warranty in this Agreement shall survive the for a           period of two years after the date hereof, providedthat (i) the           representation set forth in Section 3.1 and 3.2 shall survive indefinitely and           (ii) the survival periods set forth in this Section 5.1 shall not apply to any           claims involving fraud or bad faith on the part of any Party hereto.     ARTICLE VI  MISCELLANEOUS       6.1        Governing Law. This Agreement shall be governed in all respects, including validity, interpretation and effect, by the internal laws of the State of New York without regard to its conflict of law principles (other than Section 5-1401 of the New York General Obligation Law).        6.2        Arbitration. . All disputes between the parties hereto arising under the terms of this           Agreement or any other Transaction Documents shall be arbitrated in New York           City under the rules of the American Arbitration Association then obtaining in           the City of New York judgment on any award made by the arbitrators hereunder may           be rendered in any court having jurisdiction.        6.3        Severability.           Each Section, subsection and clause of this Agreement and each other Transaction           Documents constitutes a separate and distinct undertaking, covenant or provision           hereof. In the event that any provision of this Agreement or any other           Transaction Document shall finally be determined to be unlawful, such provision           shall be deemed severed from this Agreement or such Transaction Document, but           every other provision of this Agreement or such Transaction Document shall           remain in full force and effect.    10         6.4        Interpretation.           Whenever used in this Agreement, except as otherwise expressly provided or           unless the context otherwise requires, any noun or pronoun shall be deemed to           include the plural as well as the singular and to cover all genders. Unless           otherwise specified, words such as “herein”, “hereof”,           “hereby”, “hereunder” and words of similar import refer to           this Agreement as a whole and not to any particular Section or subsection of           this Agreement, and references herein to “Articles” or           “Sections” refer to Articles or Sections of this Agreement. The           headings in this Agreement are intended solely for convenience of reference and           shall be given no effect in the construction or interpretation of this           Agreement.        6.5        Costs and Expenses. Each Party shall bear its own expenses incurred in connection with the negotiation, preparation, execution and closing of this Agreement and each other Transaction Document and the transactions provided for hereby and thereby.        6.6        Notices.           All notices or other communications required or permitted by this Agreement or           any other Transaction Document shall be effective upon receipt and shall be in           writing and delivered personally or by overnight courier, or sent by facsimile           (with confirmation copies delivered personally or by courier within three (3)           Business Days), as follows:            If to Seller, to:        Merhav (m.n.f) Ltd                   33 Havatzelet Hasharon Street                   Herzlia, Israel                   Attention: Mr. Yossef Maiman and Mr. Leo Malamud                   Facsimile:+972-9-9501733              If to Purchaser, to:        Merhav Ampal Energy Limited                   111 Arlozorov Street                   Tel Aviv 62098 Israel                   Attention: Yoram Firon                   Facsimile:+972-3-6080101              with copies to:        Bryan Cave LLP                   1290 Avenue of the Americas                   New York, NY, USA 10019                   Attention: Kenneth Henderson, Esq.                   Facsimile: (212) 541-1357      or to such other address as hereafter shall be furnished as provided in this Section 6.6 by any Party to any other Party. Any demand, notice or other communication given by personal delivery shall be conclusively deemed to have been given on the day of actual delivery thereof and, if given by facsimile, on the day of transmittal thereof if given during the normal business hours of the recipient, and on the Business Day during which such normal business hours next occur if not given during such hours on any day.   11         6.7        Counterparts.           This Agreement and each other Transaction Document may be executed in any number           of counterparts, each of which shall be deemed an original, but all of which           together shall constitute a single instrument.        6.8        Entire Agreement. This Agreement together with the other Transaction Documents set forth the entire understanding and agreement between the Parties as to the matters covered herein and therein and supersede and replace any prior understanding, agreement or statement of intent, in each case, written or oral, of any and every nature with respect thereto. In the event of any inconsistency between this Agreement and the other Transaction Documents, this Agreement shall govern as between the Parties with respect to the matters set forth herein.        6.9        No Third Party Rights; Assignment. This Agreement is intended to be solely for the benefit of the Parties and is not intended to confer any benefits upon, or create any rights in favor, of any Person other than the Parties and shall not be assignable without the prior written Consent of the other Parties. Notwithstanding any of the foregoing, Purchaser may Transfer its rights and interests hereunder to an Affiliate.        6.10        Waivers and Amendments. No modification of or amendment to this Agreement or any other Transaction Document shall be valid unless in a writing signed by the Parties referring specifically to this Agreement or such other Transaction Document and stating the Parties’ intention to modify or amend the same. Any waiver of any term or condition of this Agreement or any other Transaction Document must be in a writing signed by the Party sought to be charged with such waiver referring specifically to the term or condition to be waived, and no such waiver shall be deemed to constitute the waiver of any other breach of the same or of any other term or condition of this Agreement or any other Transaction Document.            IN WITNESS WHEREOF, the parties hereto have duly executed this Omnibus Agreement as of the date first above written.        MERHAV AMPAL ENERGY LIMITED BY: —————————————— Name:Title:         MERHAV (M.N.F)  LIMITED BY: —————————————— Name:Title:     [SIGNATURE PAGE TO OMNIBUS AGREEMENT]   12        EX-11 5 exhibit_11.htm           10-K       Exhibit 11    AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES   SCHEDULE SETTING FORTH COMPUTATION  OF  EARNINGS PER SHARE OF CLASS A STOCK   (Amounts in thousands, except per share data)     Fiscal Year Ended December 31,   2005 2004 2003   (U.S. Dollars in thousands)             Weighted average number of shares outstanding:                    4% Preferred    116    125    132      6-1/2% Preferred    522    547    578      Class A    19,967    19,841    19,713               BASIC EPS    Net (Loss) income(1)   $  (6,149 ) $ (18,585 ) $   8,355 (2)       Earnings per Class A share   $   (0.31 ) $   (0.94 ) $    0.42         Shares used in calculation    19,967    19,841    19,713 (3)             DILUTED EPS    Net (Loss) income   $  (6,149 ) $ (18,585 ) $   8,847         Earnings per Class A share   $   (0.31 ) $   (0.94 ) $    0.40         Share used in calculation:    Basic    19,967    19,841    19,713    4% Preferred    -    -    657    6% Preferred    -    -    1,733    Option    -    -    17         Total    19,967    19,841    22,120             (1)   After deduction of preferred stock dividends (in thousands) of 191, $200                and $213 for the years 2005, 2004 and 2003, respectively.       (2)   After allocation of net income to the participating 4% Cumulative Convertible                Preferred Stock.       (3)   Restated in order to reflect the implementation of the two-class method instead                of the if converted method implemented in the past.              EX-12 6 exhibit_12.htm           10-K       Exhibit 12    AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES   SCHEDULE SETTING FORTH THE COMPUTATION OF RATIOS OF CONSOLIDATED  EARNINGS TO FIXED CHARGES  (Amounts in thousands, except ratios)     Fiscal Year Ended December 31,   2005 2004 2003   (U.S. Dollars in thousands)             Earnings:                     Income (loss) from continuing operations         (including dividends from less than 50%         owned affiliates) before income taxes, equity         in earnings of affiliates, and minority interests   $  (8,517 ) $ (33,467 ) $  14,333    Fixed charges    5,257    4,880    5,554         Earnings (insufficient earning to cover fixed    charges)   $  (3,260 ) $ (28,587 ) $  19,887         Fixed charges:       Interest   $   5,257   $   4,880   $   5,531       Amortization of debentures expenses    --    --    23            Fixed charges   $   5,257   $   4,880   $   5,554         Ratio of earnings (deficit) to fixed charges    (0.62:1 )  (5.86:1 )  (3.58:1 )            EX-21 7 exhibit_21.htm           10-K       Exhibit 21   List of Subsidiaries Ampal Financial Services Ltd., an Israeli company Ampal Development (Israel) Ltd., an Israeli company Nir Ltd., an Israeli company (in voluntary liquidation) Ampal Realty Corporation, a New York corporation Ampal Communications, Inc., a Delaware corporation Ampal Enterprises Ltd, an Israeli Company. Ampal Holdings (1991) Ltd., an Israeli company Ampal Industries, Inc., a Delaware corporation Ampal Industries (Israel) Ltd. an Israeli company (in voluntary liquidation) Ampal International Ventures (2000) Ltd., an Israeli company Ampal (Israel) Ltd., an Israeli company Ampal Properties Ltd., an Israeli company Ampal Protected Housing Holdings (1966) Ltd., an Israeli company Ampal Protected Housing (1994) Ltd., an Israeli company Ampal Protected Housing (1998) Ltd., an Israeli company Am-Hal Ltd., an Israeli company AD 120 Managements - Hod Hasharon (1966) Ltd., an Israeli company AD 120 Ramat Hachayal (Management) Ltd., an Israeli company AD 120 Ramat Hachayal Limited Partnership, an Israeli limited partnership AD 120 Hod Hasharon Limited Partnership, an Israeli limited partnership Ampal Communication LP, an Israeli limited partnership Ampal Communication Holdings Ltd., an Israeli company Ampal Energy Ltd., an Israeli company Merhav-Ampal Energy Ltd., an Israeli company Country Club Kfar Saba Limited, an Israeli company            EX-23.1 8 exhibit_23-1.htm           10-K       EXHIBIT 23.1    CONSENT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM   We consent to the incorporation by reference in Registration Statements No. 333-61895, and No. 333-55970 on Form S-8 of our report dated February 15, 2004, relating to the financial statements of Am-Hal Ltd. for the year ended December 31, 2003 appearing in this Annual Report on Form 10-K of Ampal-American Israel Corporation for the year ended December 31, 2005.  /s/ Brightman Almagor & Co. Certified Public Accountants A member firm of Deloitte Touche Tohmatsu  Tel Aviv, Israel March 26, 2006           EX-23.2 9 exhibit_23-2.htm           10-K       EXHIBIT 23.2    CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   We hereby consent to the incorporation by reference in the Registration Statement on Forms S-8, (File No. 333-61895 and File No. 333-55970) of Ampal-American Israel Corporation of our report dated March 29, 2006, relating to the financial statements and financial statement schedules, which appears in this Form 10-K.   /s/ Kesselman & Kesselman CPAs (Isr) A member of PricewaterhouseCoopers International Limited    March 29, 2006           EX-23.3 10 exhibit_23-3.htm           10-K       EXHIBIT 23.3    INDEPENDENT AUDITORS’ CONSENT    We consent to the incorporation by reference in Registration Statements No. 333-61895, and No. 333-55970 on Form S-8 of our report dated February 22, 2006, relating to the financial statements of Bay-Heart Ltd. (“the Company”) (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the matter described in Note 1C regarding the Company’s business condition) appearing in this Annual Report on Form 10-K of Ampal-American Israel Corporation for the year ended December 31, 2005.  /s/ Brightman Almagor & Co. Certified Public Accountants Member firm of Deloitte Touche Tohmatsu    Haifa, Israel, March 26, 2006.           EX-23.4 11 exhibit_23-4.htm           10-K       EXHIBIT 23.4    CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   We consent to the incorporation by reference in the Registration Statement (Forms S-8 No. 333-61895 and File No. 333-55970) of Ampal – American Israel Corporation of our report dated March 6, 2006 relating to the financial statements and financial statement schedules of Carmel Container Systems Ltd., included in this Form 10-K for the year ended December 31, 2005.                     /s/ Kost Forer Gabbay & Kasierer    Member of Ernst & Young Global   Haifa ,IsraelMarch 26, 2006           EX-23.5 12 exhibit_23-5.htm           10-K       EXHIBIT 23.5    CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   We have issued our report dated March 6, 2006 for the financial statements of C.D. Packaging Systems Ltd for the year ended December 31, 2005. We hereby consent to the incorporation by reference in the Registration Statement on Forms S-8, (File No. 333-61895 and File No. 333-55970) of Ampal-American Israel Corporation of our report dated March 6, 2006, relating to the financial statements and financial statement schedules, which appears in this Form 10-K.   /s/ Kesselman & Kesselman CPAs (Isr) A member of PricewaterhouseCoopers International Limited   March 29, 2006           EX-23.6 13 exhibit_23-6.htm           10-K       EXHIBIT 23.6    CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    We have issued our report dated March 26, 2005 for the financial statements of Coral World International Ltd. for the year ended December 31, 2005. We hereby consent to the incorporation by reference in the Registration Statement on Forms S-8, (File No. 333-61895 and File No. 333-55970) of Ampal – American Israel Corporation of our report dated March 26, 2006 relating to the financial statements and financial statement schedules, which appears in this Form 10-K.                      /s/ Fahn, Kanne & Co.    Certified Public Accountants (Isr.)  Tel-Aviv, Israel March 26, 2006           EX-23.7 14 exhibit_23-7.htm           10-K       EXHIBIT 23.7    Tel – Aviv, 26 March , 2006     TO:FROM:    Ampal - - American Israel Corporation         RE:COMPANY NAME:    Consent                Epsilon Investment House Ltd.      CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   We hereby consent to the incorporation by reference in the Registration Statement on Forms S-8, (File No. 333-61895 and File No. 333-55970) of Ampal – American Israel Corporation of our report dated 24/2/2005 relating to the financial statements and financial statement schedules, which appears in this Form 10-K.      /s/ Kost Forer Gabbay & KasiererMember practice of Ernst & young global              EX-23.8 15 exhibit_23-8.htm           10-K       EXHIBIT 23.8    Consent of Independent Registered Public Accounting Firm    The Board of Directors    Granite Hacarmel Investments Limited   We consent to the incorporation by reference in the registration statements (No. 333-61895 and No. 333-55970) on Form S-8 of Ampal American Israel Corporation of our report dated March 25, 2004, with respect to the consolidated balance sheet of Granite Hacarmel Investments Limited and subsidiaries as of December 31, 2003 and the related statements of income, shareholders’ equity and cash flows for the year then ended, which report appears in the December 31, 2005, annual report on Form 10-K of Ampal American Israel Corporation.   Our report dated March 25, 2004 contains an explanatory paragraph for claims against consolidated companies.  /s/ Somekh Chaikin Certified Public Accountants (Isr.)    Haifa, March 26, 2006           EX-23.9 16 exhibit_23-9.htm           10-K       EXHIBIT 23.9    CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   We have issued our report dated February 28, 2006 for the financial statements of Hod Hasharon Sport Center Limited for the year ended December 31, 2005. We hereby consent to the incorporation by reference in the Registration Statement on Forms S-8, (File No. 333-61895 and File No. 333-55970) of Ampal – American Israel Corporation of our report dated February 28, 2006 relating to the financial statements and financial statement schedules, which appears in this Form 10-K.  /s/ Somekh Chaikin Certified Public Accountants (Israel)  Tel Aviv, Israel March 26, 2006           EX-23.10 17 exhibit_23-10.htm           10-K       EXHIBIT 23.10    CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   We have issued our report dated February 28, 2006 for the financial statements of Hod Hasharon Sport Center (1992) Limited Partnership for the year ended December 31, 2005. We hereby consent to the incorporation by reference in the Registration Statement on Forms S-8, (File No. 333-61895 and File No. 333-55970) of Ampal – American Israel Corporation of our report dated February 28, 2006 relating to the financial statements and financial statement schedules, which appears in this Form 10-K.  /s/ Somekh Chaikin Certified Public Accountants (Israel)   Tel Aviv, IsraelMarch 26, 2006           EX-23.11 18 exhibit_23-11.htm           10-K       EXHIBIT 23.11    CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   We have issued our report dated March 27, 2006 for the financial statements of Ophir Holdings Ltd. for the year ended December 31, 2005. We hereby consent to the incorporation by reference in the Registration Statement on Forms S-8, (File No. 333-61895 and File No. 333-55970) of Ampal-American Israel Corporation of our report dated March 27, 2006, relating to the financial statements and financial statement schedules, which appears in this Form 10-K.   /s/ Kesselman & Kesselman CPAs (Isr) A member of PricewaterhouseCoopers International Limited   March 29, 2006           EX-23.12 19 exhibit_23-12.htm           10-K       EXHIBIT 23.12    CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   We have issued our report dated March 27, 2006 for the financial statements of Ophirtech Ltd. for the year ended December 31, 2005. We hereby consent to the incorporation by reference in the Registration Statement on Forms S-8, (File No. 333-61895 and File No. 333-55970) of Ampal-American Israel Corporation of our report dated March 27, 2006, relating to the financial statements and financial statement schedules, which appears in this Form 10-K.   /s/ Kesselman & Kesselman CPAs (Isr) A member of PricewaterhouseCoopers International Limited   March 29, 2006           EX-23.13 20 exhibit_23-13.htm           10-K       EXHIBIT 23.13    Tel – Aviv, 26 March , 2006     TO:FROM:    Ampal - - American Israel Corporation         RE:COMPANY NAME:    Consent                Renaissance Investment Company Ltd.      CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   We hereby consent to the incorporation by reference in the Registration Statement on Forms S-8, (File No. 333-61895 and File No. 333-55970) of Ampal – American Israel Corporation of our report dated 24/2/2005 relating to the financial statements and financial statement schedules, which appears in this Form 10-K.      /s/ Kost Forer Gabbay & KasiererMember practice of Ernst & young global              EX-31.1 21 exhibit_31-1.htm           10-K       Exhibit 31.1    CERTIFICATION   I, Jack Bigio, certify that:     1.   I have reviewed this annual report on Form 10-K of Ampal – American Israel                Corporation;        2.   Based on my knowledge, this report does not contain any untrue statement of a                material fact or omit to state a material fact necessary to make the statements                made, in light of the circumstances under which such statements were made, not                misleading with respect to the period covered by this report;        3.   Based on my knowledge, the financial statements, and other financial information                included in this report, fairly present in all material respects the financial                condition, results of operations and cash flows of the registrant as of, and                for, the periods presented in this report;        4.   The registrant’s other certifying officer(s) and I are responsible for                establishing and maintaining disclosure controls and procedures (as defined in                Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:          (a)  Designed such disclosure controls and procedures, or caused such disclosure           controls and procedures to be designed under our supervision, to ensure that           material information relating to the registrant, including its consolidated           subsidiaries, is made known to us by others within those entities, particularly           during the period in which this report is being prepared;          (b)  Evaluated the effectiveness of the registrant’s disclosure controls and           procedures and presented in this report our conclusions about the effectiveness           of the disclosure controls and procedures, as of the end of the period covered           by this report based on such evaluation; and          (c)  Disclosed in this report any change in the registrant’s internal control           over financial reporting that occurred during the registrant’s most recent           fiscal quarter (the registrant’s fourth fiscal quarter in the case of an           annual report) that has materially affected, or is reasonably likely to           materially affect, the registrant’s internal control over financial           reporting; and        5.   The registrant’s other certifying officer(s) and I have disclosed, based on                our most recent evaluation of internal control over financial reporting, to the                registrant’s auditors and the audit committee of the registrant’s                board of directors (or persons performing the equivalent functions):          (a)  All significant deficiencies and material weaknesses in the design or operation           of internal control over financial reporting which are reasonably likely to           adversely affect the registrant’s ability to record, process, summarize and           report financial information; and          (b)  Any fraud, whether or not material, that involves management or other employees           who have a significant role in the registrant’s internal control over           financial reporting.        Date:    March 29, 2006   By: /s/ Jack Bigio—————————————— Jack BigioPresident and Chief Executive Officer             EX-31.2 22 exhibit_31-2.htm           10-K       Exhibit 31.2    CERTIFICATION   I, Irit Eluz, certify that:     I have reviewed this annual report on Form 10-K of Ampal – American Israel Corporation;        2.   Based on my knowledge, this report does not contain any untrue statement of a                material fact or omit to state a material fact necessary to make the statements                made, in light of the circumstances under which such statements were made, not                misleading with respect to the period covered by this report;        3.   Based on my knowledge, the financial statements, and other financial information                included in this report, fairly present in all material respects the financial                condition, results of operations and cash flows of the registrant as of, and                for, the periods presented in this report;        4.   The registrant’s other certifying officer(s) and I are responsible for                establishing and maintaining disclosure controls and procedures (as defined in                Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:          (a)  Designed such disclosure controls and procedures, or caused such disclosure           controls and procedures to be designed under our supervision, to ensure that           material information relating to the registrant, including its consolidated           subsidiaries, is made known to us by others within those entities, particularly           during the period in which this report is being prepared;          (b)  Evaluated the effectiveness of the registrant’s disclosure controls and           procedures and presented in this report our conclusions about the effectiveness           of the disclosure controls and procedures, as of the end of the period covered           by this report based on such evaluation; and          (c)  Disclosed in this report any change in the registrant’s internal control           over financial reporting that occurred during the registrant’s most recent           fiscal quarter (the registrant’s fourth fiscal quarter in the case of an           annual report) that has materially affected, or is reasonably likely to           materially affect, the registrant’s internal control over financial           reporting; and        5.   The registrant’s other certifying officer(s) and I have disclosed, based on                our most recent evaluation of internal control over financial reporting, to the                registrant’s auditors and the audit committee of the registrant’s                board of directors (or persons performing the equivalent functions):          (a)  All significant deficiencies and material weaknesses in the design or operation           of internal control over financial reporting which are reasonably likely to           adversely affect the registrant’s ability to record, process, summarize and           report financial information; and          (b)  Any fraud, whether or not material, that involves management or other employees           who have a significant role in the registrant’s internal control over           financial reporting.        Date:    March 29, 2006  By: /s/ Irit Eluz—————————————— Irit Eluz CFO and Senior Vice President - Financeand Treasurer             EX-32 23 exhibit_32.htm           10-K       Exhibit 32    CERTIFICATION PURSUANT TO  18 U.S.C. SECTION 1350,  AS ADOPTED PURSUANT TO  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002           In connection with the annual report of Ampal-American Israel Corporation (the “Company”) on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned executive officers of the Company certifies, to the best of such executive officer’s knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:       (1)  The Report fully complies with the requirements of Section 13(a) or 15(d) of           the Securities Exchange Act of 1934; and          (2)  The information contained in the Report fairly presents, in all material           respects, the financial condition and results of operations of the Company.         By: /s/ Jack Bigio—————————————— Jack Bigio President and CEOAmpal-American Israel Corporation March 29, 2006 By: /s/ Irit Eluz—————————————— Irit Eluz CFO and Senior Vice President-Finance and TreasurerAmpal-American Israel Corporation March 29, 2006     A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.           -----END PRIVACY-ENHANCED MESSAGE-----