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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 20-F(Mark One)

oREGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
1934

OR

xANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003

OR

oTRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________

Commission file number 333-100683

BARAN GROUP, LTD.(Exact name of Registrant as specified in its charter)

BARAN GROUP, LTD.(Translation of Registrants name into English)

ISRAEL
(Jurisdiction of incorporation or organization)

BARAN HOUSE
8 OMARIM STREET INDUSTRIAL PARK
OMER 84965
ISRAEL
(Address of principal executive offices)

Securities registered or to be registered
pursuant to Section 12(b) of the Act.

|Title of each class |  | Name of each exchange on which registered
|------------------- |  | -----------------------------------------
|                    |  |                                          
|                    |  | NONE                                     

Securities registered or to be registered
pursuant to Section 12(g) of the Act.

ORDINARY SHARES, NIS 1.00 PAR VALUE PER SHARE
(Title of Class)

Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act.

NONE

As of June 20, 2004, the Registrant had
8,375,884 Ordinary Shares issued and outstanding

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

Indicate by check mark which financial
statement item the registrant has elected to follow.oItem
17xItem
18

1

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TABLE OF CONTENTS

|         |                                                                                        | Page
|-------- | -------------------------------------------------------------------------------------- | ----
|         |                                                                                        |     
|         | FORWARD LOOKING STATEMENTS                                                             | 3   
|PART I   | 4                                                                                     
|         | ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS                          | 4   
|         | ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                                        | 4   
|         | ITEM 3. KEY INFORMATION                                                                | 4   
|         | ITEM 4. INFORMATION ON THE COMPANY                                                     | 19  
|         | ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                   | 37  
|         | ITEM 6. DIRECTORS AND SENIOR MANAGEMENT                                                | 58  
|         | ITEM 7.  MAJOR SHAREHOLDERS
  AND RELATED PARTY TRANSACTIONS                           | 65  
|         | ITEM 8. FINANCIAL INFORMATION                                                          | 67  
|         | ITEM 9. OFFERS AND LISTING                                                             | 67  
|         | ITEM 10. ADDITIONAL INFORMATION                                                        | 70  
|         | ITEM 11. QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                       | 85  
|         | ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                        | 89  
|PART II  | 89                                                                                    
|         | ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                               | 89  
|         | ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
  USE OF RECORDS | 89  
|         | ITEM 15. CONTROL AND PROCEDURES                                                        | 90  
|         | ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                             | 91  
|         | ITEM 16B. CODE OF ETHICS                                                               | 91  
|         | ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 91  
|         | ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 95  
|         | ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
  PURCHASERS     | 95  
|PART III | 95                                                                                    
|         | ITEM 17. Not Applicable                                                                | 95  
|         | ITEM 18. FINANCIAL STATEMENTS                                                          | 95  
|         | ITEM 19. EXHIBIT INDEX                                                                 | 95  

2

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FORWARD LOOKING STATEMENTS

The Securities and Exchange Commission (SEC) encourages companies to
disclose forward-looking information so that investors can better understand a
companys future prospects and make informed investment decisions. This Form
20-F contains such forward-looking statements. These statements may be made
directly in this Form 20-F referring to Baran Group Ltd., its subsidiaries and
affiliated entities and it may also be made a part of this Form 20-F by
reference to other documents filed with the Securities and Exchange Commission
by Baran Group Ltd., which is known as incorporation by reference. These
statements may include statements regarding future events. Words such as
anticipate, estimate, expects, projects, intends, plans,
believes and words and terms of similar substance used in connection with
any discussion of future operating or financial performance, identify
forward-looking statements. All forward-looking statements are managements
present expectations of future events and are subject to a number of factors
and uncertainties that could cause actual results to differ materially from
those described in the forward-looking statements. Such factors and
uncertainties, including the risks related to the businesses of Baran Group
Ltd., discussed under Risk Factors, (see Key Information) among others,
could cause actual results to differ materially from those described.
Shareholders are cautioned not to place undue reliance on the forward-looking
statements, which speak only of the date of this Form 20-F or the date of the
document incorporated by reference in this Form 20-F. Baran Group Ltd. is under
no obligation, and expressly disclaims any obligation, to update or alter any
forward-looking statements, whether as a result of new information, future
events or otherwise.

3

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PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR
MANAGEMENT AND ADVISORS

Not Applicable

ITEM 2. OFFER STATISTICS AND EXPECTED
TIMETABLE

Not Applicable

ITEM 3. KEY INFORMATION

The selected financial data is incorporated by reference to Item 5 of
this annual report.

Risk Factors

This Annual Report and statements that we
make from time to time may contain forward-looking statements. There can be no
assurance that actual results will not differ materially from our expectations,
statements, or projections. Factors that could cause actual results to differ
from our expectations, statements or projections include, among other things,
the risks and uncertainties related to our business described below. Unless
otherwise indicated, when the term Baran is used throughout this Annual
Report, it shall mean The Baran Group Ltd., together with its subsidiaries and
affiliates.

The markets in which Baran competes are
highly competitive.

The telecommunications network services market and other markets in
which Baran competes are highly competitive and are served by numerous
companies.  Many of these competitors
have significantly greater financial, technical and marketing resources,
generate greater revenues and have greater name recognition and international
experience than Baran.  Baran believes
that the principal competitive factors in its markets include the ability to
deliver services within budget and on time, pricing, reputation,
accountability, project management expertise, industry experience and expertise
in new and evolving technologies.  Baran
may not be able to compete effectively on these or other bases, and, as a
result, it may not be able to maintain current customer relationships or
develop new customer relationships.

Baran must continually enhance its technical
abilities and areas of expertise to remain competitive.

Baran believes that its future success, to a significant extent,
depends upon its ability to enhance its existing technical abilities and to
meet the requirements of its customers in rapidly developing and evolving
markets. Although Baran is currently devoting significant resources to enter
additional areas of project management and operation, and is planning to
develop new areas of expertise, Barans present or future abilities may not
satisfy the evolving needs of customers in the sectors it services. If Baran is
unable to anticipate or respond adequately to those demands, due to resources,
technological or other constraints, its business and results of operations
could be materially adversely affected.

4

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Endeavors to develop new markets pose a risk
to Baran as the investment allocated may be written off.

Part of Barans strategy is to pursue and develop new markets, in order
to expand its business. The costs involved in such endeavors pose a risk to
Baran, as the attempt to penetrate new markets may fail and the investment related
may be written off.

For example the efforts of Baran to enter the markets of Thailand and
South Africa, required the substantial amounts of time, human resources and
assets for the purpose of marketing and publication. All theses efforts, which
are still in the process of penetrating theses new markets, have not ripened
yet.

Baran experiences a substantial increase in
the number of legal claims it is a party to.

During 2003 the number of legal claims in which Baran is a party
increased by more than 30%. This increase is a direct result of the recession
in Israel and economic slow down, as well as, the high profile nature of
Barans projects, which leads to an automatic joinder of Baran as a party. The
increase in legal claims poses a risk on Baran and may negatively affect its
result of operation.

Barans businesses are highly dependent on a
limited number of significant customers.

The loss of any significant customer of Barans, a significant decrease
in business from any of those customers or the conclusion or termination of
significant projects, without securing other significant projects or customers,
could have a material adverse effect on the results of operations and financial
condition of Baran. Although Baran has more than one thousand customers,
revenues derived from main customers accounted for approximately 10% of
revenues in the year ended, December 31, 2003 (fiscal 2003) and 21% and 55%
of revenues in the years ended December 31, 2002 (fiscal 2002) and 2001
(fiscal 2001), respectively. Barans major customers do not have any
obligation to purchase additional services and, therefore, may not continue to
purchase services in amounts similar to previous years. In addition, customers
may terminate a project before it is completed, and will be obligated to pay
Baran only for the work performed up to termination. Early termination of one
or more projects by one of Barans major customers could have a material
adverse effect on Barans business, financial condition and results of
operations.

5

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Baran performs credit evaluations of its customers and does not
generally require collateral from its customers. If any of its major customers
or a significant portion of its existing customers becomes insolvent or is
otherwise unable to pay its debts, it could have a material adverse effect on
Barans business, financial condition and results of operations.

Barans customers dependence on bank credit
and loans may harm their ability to repay their liabilities.

Several of Barans large customers main source of capital and finance
is substantially dependant on bank credit and loans. In the event the Banks
cease to grant loans and credit to the abovementioned customers, the customers
ability to fulfill its liabilities to Baran may be prejudiced.

The engineering business relies on a number
of customers and large multi-year contracts. Unfavorable developments under a
major contract or in relation to a major customer may affect Barans sales,
result of operations and cash flow adversely.

Large multi-year contracts are typical in the engineering industry and
include a risk that the timing of sales and results of operations associated
with these contracts will be different than expected. Moreover, they usually
require the dedication of substantial amounts of working capital and other
resources, which impacts our cash flow negatively. Any non-performance and /or
unforeseen events by Baran and/or its subcontractors and/or its vendors, under
these contracts may have significant adverse consequences for Baran.

Barans success depends on its ability to
develop long-term relationships with its customers.

Baran believes that its future success depends significantly on its
ability to develop long-term relationships with successful network operators,
service providers and other clients in the markets and industrial sectors it
services. Baran may be unable to develop new customer relationships, and its
new customers may be unsuccessful in their own businesses. Barans failure to
maintain customer relationships or the failure of new customers to be
successful could affect Barans ability to receive additional work from the
same customers in the future, which could reduce Barans revenues.

Barans directors, executive officers and
principal shareholders will be able to exert substantial influence over Barans
affairs.

As of June 14, 2004, Barans directors, executive officers and
principal shareholders currently beneficially own, in the aggregate,
approximately 26.1% of Barans ordinary shares. These shareholders, acting
together under voting agreements or otherwise, have the ability to exert
substantial influence over all matters requiring approval by Barans
shareholders. These matters include the election and removal of Barans
directors and any merger, consolidation or sale of all or substantially all of
Barans assets.

6

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The skilled employees that Baran needs may be
difficult to hire and retain.

Barans success depends in large part on its ability to attract, train,
motivate and retain highly skilled engineers and other professional employees.
These types of qualified personnel are in great demand and are likely to remain
a limited resource for the foreseeable future. The ability of Baran to expand
its business depends upon its success in recruiting qualified technical
personnel and its ability to manage and coordinate its worldwide development
efforts. Baran may be unable to attract and retain the skilled employees it
requires. Any inability to do so could adversely impact Barans ability to
manage and complete its existing projects and to compete for new customer
contracts. Barans failure to attract and retain qualified personnel may have a
material adverse effect on Barans business, results of operations and
financial condition. Baran believes that the continuity of its management team
is an important element in the stability of its operations and that its success
depends, to a certain extent, upon the continued active participation of a
relatively small group of senior management personnel who have been with Baran
for a long period of time. The loss of the services of all or some of these key
employees could have a material adverse effect Barans business, result of
operation and financial condition.

The efficiency measures taken by Baran during 2003 resulted in the
dismissal or departure of a number of employees including skilled employees. In
the event Baran receives new projects, it will be required to recruit new
employees and invest considerable amounts and time in their training.

Baran may make additional acquisitions that
increase leverage and pose other risks.

Baran has evaluated and continues to evaluate potential acquisitions,
joint ventures and other relationships that would extend its geographic
markets, expand its products and services or enlarge its capacity to service
customers. Some of these transactions may be considerably larger than the
transactions it has completed in the past. If Baran completes any such
transaction, it could result in Baran increasing its leverage, issuing additional
ordinary shares or both. There can be no assurance, however, that Baran will
able to find suitable acquisition candidates or, if desirable candidates are
found, to complete any desired acquisition on favorable terms.

Any acquisition that Baran completes will likely also involve some or
all of the following operating risks:

| | the
  difficulty of assimilating the acquired operations and personnel;
|- | -----------------------------------------------------------------------

7

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| | the
  potential disruption of Barans ongoing business;                                                   
|- | ----------------------------------------------------------------------------------------------------------
|  |                                                                                                           
| | the
  diversion of managements time and other resources;                                                 
|  |                                                                                                           
| | the possible
  inability of management to maintain uniform standards, controls, procedures
  and policies;
|  |                                                                                                           
| | the
  difficulty of managing growth;                                                                      
|  |                                                                                                           
| | the risks of
  entering markets in which Baran has little experience; and                                 
|  |                                                                                                           
| | the impairment
  of relationships with employees or customers.                                            

Government regulation and industry standards
in different countries increase Barans costs of doing business, limit its
potential markets, require cooperation with local companies, and may delay or
prevent the sale of its services.

When providing its services, Baran must comply with regulatory
requirements and industry standards in each country in which such services are
performed. The need to comply with prevailing regulatory requirements and
standards requires Baran to invest in time-consuming and expensive procedures
that may result in Barans inability to compete effectively with other service
providers. For example, employees in many countries in which Baran operates may
not begin work without first obtaining a work permit from the local
authorities. The issuance of work permits is a time-consuming process, which
can delay employees ability to commence work, and which can consequently
result in Barans inability to staff a project adequately and in a timely
manner. In addition, government regulations in several countries in Western
Europe prohibit employers such as Baran from dismissing employees without
advance notice to the employees. This may result in a delay in Barans ability
to remove employees who are not performing well from working on a project.

Fundamental changes in the markets which
Baran targets could reduce demand for Barans services.

Future developments in the telecommunications, cellular,
semiconductors, biotechnology, high technology, chemical, pharmaceutical and
other industries serviced by Baran, such as budget reductions, unavailability
of funding, termination of projects and development plans, industry
consolidation and a general reduction in expansion programs, could materially adversely
affect Barans existing or potential customers. This could reduce the demand
for Barans products and services. As a result, Baran may be unable to
effectively market its services to potential customers in the industries it
targets. In addition, cuts in government budgets that are allocated to
infrastructure projects in which Baran participates may adversely affect
Barans operational results. Many of the markets served by Baran, including the
semiconductors and communications markets, are currently in the midst of
recessions.  If this economic climate
persists, it could have a material adverse effect on Barans business and
results of operations. In fiscal 2003, Barans Industrial Division and
Communications Division were responsible for 19% and 34% respectively, of
Barans overall revenues.

8

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Part of Barans success is dependent on
continued growth in the deployment of wireless networks.

The wireless telecommunications industry experienced significant growth
in Israel, the United States and internationally throughout the 1990s. More
recently, access to capital markets has become more difficult and more
expensive for many of the carriers, thereby slowing their capital spending
commitments. Presently, there is significant uncertainty related to the
economies of the United States, Israel and other countries throughout the
world.  If the rate of growth in the
telecommunications industry continues to slow or remains stagnant, and carriers
continue to reduce their capital investments in wireless infrastructure or fail
to expand into new territories, Barans business and results of operations will
suffer. The pace of network deployment has sometimes been slower than expected,
due in part to difficulties experienced by holders of licenses in raising the necessary
financing, and there can be no assurance that future bidders for licenses will
not experience similar difficulties. There has also been substantial regulatory
uncertainty regarding continued ownership of wireless licenses awarded by the
U.S. government to successful bidders, and such uncertainty has delayed network
deployments. Factors such as overall economic conditions, a slowdown in
wireless subscriber growth, costs of integrating technologies, as well as
future legislation, legal decisions and regulations, may slow or delay the
deployment of wireless networks, which, in turn, could harm Barans business,
results of operation and financial condition.

The consolidation of equipment vendors or
carriers could adversely affect Barans communication business.

In recent years, the wireless telecommunications industry has been
characterized by significant consolidation activity. Consolidation of equipment
vendors or carriers could:

| | lead to a
  greater ability among equipment vendors or carriers to provide a full line of
  network services and could simplify integration and installation, which may
  lead to a reduction in demand for Barans services;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | reduce the
  number of Barans current or potential customers, which could increase their
  bargaining power; and                                                                                                            
| | create
  competitive pressures whereby a particular customer may request Barans
  exclusivity within a particular market or other terms and conditions which
  Baran may not be able to or want to accommodate.             

Any of the foregoing developments could adversely affect Barans
business, results of operation and financial condition.

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Barans operations in a market where there is
a lengthy period of time between the making of an initial proposal to a
prospective customer and the signing of a services agreement
makes it difficult to anticipate the timing
of revenue recognition.

The sales cycle associated with the acquisition of Barans services
related to projects is lengthy, with the time between the making of an initial
proposal to a prospective customer and the signing of a services agreement
ranging between 3 to 12 months. Barans services for its customers are
relatively complex, and their purchase generally involves a significant
commitment of capital, with attendant delays frequently associated with large
capital expenditures and implementation procedures. Moreover, the purchase of
such services typically requires coordination and agreement across a potential
customers entire organization. Delays associated with the sales cycle for
Barans services may reduce Barans revenues in a particular period without a
corresponding reduction in its costs.

The provision of services by Baran on a
turnkey project basis creates special risks.

Baran performs a significant and increasing portion of its services on
a turnkey project basis. In providing services in this manner, Baran serves as
a single contact point for the design, planning, quality control and delivery
of the applicable project and is responsible for the quality of work performed
by subcontractors and materials provided by suppliers. Any defaults in the
performance of the work by its subcontractors or defects in the materials
provided by its suppliers may expose Baran to claims, including failure to meet
timetables for the completion of projects or failures to adhere to quality
standards committed to by Baran. In addition, Baran typically provides a 12 to
24 month warranty period to its customers, pursuant to which it may have
additional liability. In some events, upon the customers request, Baran
extends the last performance guarantee until the end of the liability period.
Projects performed by Baran on a turnkey basis typically generate lower gross
margins due to increased expenses associated with servicing a customer in this
manner. Baran anticipates that the number of projects it performs on a turnkey
basis will continue to increase.

The high profile nature of the projects in
which Baran is involved may result in increased costs or claims.

Many of our engagements involve projects that are significant to the
operations of our customers businesses. Our failure to meet a customers
expectations in the planning or implementation of a project or the failure of
unrelated third party contractors to meet project completion deadlines could
damage our reputation and adversely affect our ability to attract new business.
We frequently undertake projects in which we guarantee performance based upon
defined operating specifications or guaranteed delivery dates. Unsatisfactory
performance or difficulties or delays in completing such projects may result in
a reduction in payments to Baran, or in the payment of damages by us, which
could harm our business, results of operations and financial condition.

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Government grants received by Baran for
research and development expenditures restrict its ability to manufacture some
products and transfer technologies outside of Israel and require Baran to
satisfy specified conditions. If Baran fails to satisfy these conditions, it
may be required to refund grants previously received together with interest and
penalties, and may be subject to criminal charges.

From 1998 to 2003, Baran received grants from the Government of Israel
through the Office of the Chief Scientist of the Ministry of Industry and Trade
for the financing of a portion of Barans research and development expenditures
in Israel, the remainder outstanding Baran has to potentially pay back is an
approximate amount of NIS 3.5 million ($0.8 million), which potentially
constitutes 2%-3% of income, if any. The sum represents related royalties of 2%
to 3% of product sale, if any. The terms of these grants prohibit Baran from
manufacturing products or transferring technologies developed using these
grants outside of Israel without special approvals. Even if Baran receives approval
to manufacture the products developed by it outside of Israel, it may be
required to pay an increased amount of royalties, which may be up to 300% of
the grant amount plus interest, depending on the manufacturing volume that is
performed outside of Israel. Transfer of the developed technologies out of
Israel may be prohibited altogether. This restriction may impair Barans
ability to outsource manufacturing or engage in similar arrangements for those
products or technologies. In addition, if Baran fails to comply with any of the
conditions imposed by the Office of the Chief Scientist, it may be required to
refund any grants previously received together with interest and penalties, and
may be subject to criminal charges. In recent years, the Government of Israel
has accelerated the rate of repayment of Office of Chief Scientist grants and
may further accelerate repayments in the future.

Under current Israeli law, Baran may not be
able to enforce covenants not to compete and therefore may be unable to prevent
its competitors from benefiting from the expertise of its former employees.

Baran currently has non-competition agreements with most of its
employees. These agreements prohibit such employees, if they cease working for
Baran, from directly competing with Baran or working for its competitors.
Recently, Israeli courts have required employers seeking to enforce non-compete
undertakings of a former employee to demonstrate, among other things, that the
competitive activities of the former employee will harm one of a limited number
of material interests of the employer that have been recognized by the courts,
such as the secrecy of a companys confidential commercial information or its
intellectual property. If Baran cannot demonstrate that the type of harm that
the court seeks to protect would be caused to it, it may be unable to prevent
its competitors from benefiting from the expertise of its former employees.

11

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Barans quarterly operating results may
fluctuate.

Barans quarterly operating results may fluctuate as a result of many
factors, including:

| | the size and
  timing of significant customer projects;
|- | -------------------------------------------------------
|  |                                                        
| | increased
  competition;                               
|  |                                                        
| | cancellations
  of significant projects by customers;  
|  |                                                        
| | changes in
  operating expenses;                       
|  |                                                        
| | changes in
  Barans strategy;                         
|  |                                                        
| | personnel
  changes;                                   
|  |                                                        
| | foreign
  currency exchange rates; and                 
|  |                                                        
| | general
  economic and political factors.              

Given Barans reliance on a limited number of significant customers and
projects, its quarterly results may be significantly affected by the size and
timing of projects and its progress in completing such projects. The placement
of customer orders has from time to time been concentrated in specific
quarterly periods due to the time requirements and budgetary constraints of its
customers. Although Baran recognizes revenue as projects progress, progress may
vary significantly from project to project, and variations in quarterly revenue
are sometimes attributable to the timing of initial order placements.

Barans financial condition has been adversely
impacted by the continuing economic downturn. If the economic downturn
continues, Barans revenues and financial condition may deteriorate further.

Baran generated negative cash flow from operations in fiscal year 2003
of NIS 63.3 million ($14.5 million). In part this was the result of the
deterioration in Barans revenues which have fallen since 2001 as a result of
the continuing economic downturn. If the current economic downturn continues,
Barans clients may seek to continue to cut costs, or delay, curtail or cancel
projects in general and with Baran in particular. Government clients may face
budget deficits that prohibit them from funding new or existing projects.
Barans clients may also demand better pricing terms. In addition, continuation
of the economic downturn may impact Barans clients ability to pay their bills
and Barans ability to collect cash from them to meet its operating needs.
Nonetheless, at present Baran doesnt have any significant doubtful accounts. Although some
recent economic indicators have been positive, it is not yet known whether
these indicators will positively affect Barans revenues and profits or if the
economic downturn will continue.

12

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The market for Barans shares may be harmed
due to the fact it is an Israeli company.

Certain investors may be reluctant to invest in Baran due to the fact
Baran is an Israeli company which may adversely affect the price of its shares.
Even investors that are willing to invest in Israeli companies may be unwilling
to invest in Baran because it provides services in Israel and may be adversely
affected by the political situation that currently exists in Israel in
particular and in the Middle East in general.

Conditions in Israel affect Barans
operations and may limit its ability to provide and sell its services.

Baran is incorporated under Israeli law and its principal offices and
the majority of its facilities and employees are located in Israel. Political,
economic and military conditions in Israel directly affect Barans operations.
Since the establishment of the State of Israel in 1948, numerous armed
conflicts have taken place between Israel and its Arab neighbors and a state of
hostility, varying in degree and intensity, has led to security and economic
problems for Israel. Despite the progress towards peace between Israel and its
Arab neighbors in the last two decades, the future of these peace efforts is
uncertain. Since October 2000, there has been a significant increase in
violence primarily in the West Bank and Gaza Strip and negotiations between
Israel and Palestinian representatives have ceased. Any future armed conflict,
political instability or continued violence in the region would likely have a
negative effect on Barans business condition, harm its results of operations
and adversely affect the share price of publicly traded Israeli companies such
as Baran. Furthermore, several countries still restrict trade with Israeli
companies, which may limit Barans operations in those countries. These
restrictions may have an adverse impact on Barans operating results and
financial condition.

Barans operations could be disrupted as a
result of the obligation of key personnel in Israel to perform military
service.

Generally, all male adult citizens and permanent residents of Israel
under the age of 54 are obligated to perform military reserve duty annually
unless exempt. Many of Barans officers and employees are currently obligated
to perform annual reserve duty. Barans operations could be disrupted by the
absence of a number of its officers or employees due to military service. Any
disruption to Barans operations could materially adversely affect the
development of its business and its financial condition.

13

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Future non-compliance with certain government
programs and tax benefits in Israel could adversely affect Barans overall
effective tax rate.

Baran benefits from certain Israeli government programs and tax
benefits, which benefits, between the years 1998 and 2002, have amounted to
approximately NIS 2.5 million. For example, some of Barans subsidiaries that
are designated as approved enterprises receive tax benefits under the
Israeli Law for Encouragement of Capital Investments. No tax benefits were
received during 2003, however, to remain eligible for these programs and tax
benefits, Barans subsidiaries must meet certain conditions, such as those
relating to the location of Barans subsidiaries facilities, location of
certain subcontractors and the extent to which the subsidiaries may outsource
portions of their work. If Barans subsidiaries fail to meet these conditions,
Baran could be required to refund tax benefits already received in the amount
of NIS 2.5 million, plus interest. Additionally, some of these programs and the
related tax benefits are available to Baran for a limited number of years, and
these benefits expire from time to time.

Any of the following could result in a material increase in the overall
effective tax rate of Baran:

| | some
  programs may be discontinued or may not be available at their current levels,
  such that the Government of Israel may reduce or eliminate the tax benefits
  available to approved enterprises; and
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                               
| | Barans
  subsidiaries may be unable to meet the requirements for continuing to qualify
  for some incentive tax programs.                                                                                    

Upon the expiration of a particular benefit, Baran may not be eligible
to participate in a new program or qualify for a new tax benefit that would
offset the loss of the expiring tax benefit.

The rights of shareholders of Israeli
corporations differ in some respects from those of shareholders of United
States corporations.

Baran is incorporated under the laws of Israel. The rights of holders
of ordinary shares are governed by Israeli law, including the Israeli Companies
Law, and by Barans Articles of Association. These rights differ in some
respects from the rights of shareholders in corporations incorporated in the
United States. See Item 10 below.

The new Israeli Companies Law may cause
uncertainties regarding corporate governance.

The new Israeli Companies Law, which became effective on February 1,
2000, has resulted in significant changes to Israeli corporate law. Because
this law has been recently enacted, uncertainties may arise regarding corporate
governance in some areas. For example, the law obligates a controlling
shareholder, defined as a shareholder who knows that its vote can determine the
outcome of a shareholder vote and any shareholder who, under Barans articles
of association, can appoint or prevent the appointment of an office holder, to act
with fairness towards Baran. The Israeli Companies Law does not specify the
substance of this duty and there is no binding case law that addresses this
subject directly. These and other uncertainties could exist until this law has
been adequately interpreted, and these uncertainties could adversely affect
Barans ability to engage in various types of corporate transactions and
inhibit other corporate decisions.

14

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It may be difficult to enforce a United
States judgment against Baran, its officers and directors and to assert United
States securities laws claims in Israel, or to serve process on such officers
or directors.

Baran is incorporated in Israel. The majority of its executive officers
and directors are not residents of the United States, and the majority of its
assets and the assets of these persons are located outside the United States.
Therefore, it may be difficult for a shareholder, or any other person or
entity, to enforce a United States court judgment based upon the civil
liability provisions of the United States federal securities laws in an Israeli
court or in a United States court against Baran or any of these persons or to
affect service of process upon these persons. Additionally, it may be difficult
for a shareholder, or any other person or entity, to assert United States
securities law claims in original actions instituted in Israel. Israeli courts
may refuse to hear a claim based on a violation of United States securities
laws because Israel is not the most appropriate forum in which to bring such a
claim. In addition, even if an Israeli court agrees to hear a claim, it may
determine that Israeli law and not United States law is applicable to the
claim. If United States law is found to be applicable, the content of
applicable United States law must be proved as a fact in the court proceeding
which can be a time-consuming and costly process. Certain matters of procedure
will also be governed by Israeli law. There is little binding case law in
Israel addressing the matters described above.

Cancellation and postponement of large
infrastructure projects by the State of Israel, due to economic slow down,
political strategies and dominant presence of governmental entities in the
infrastructure market may result in substantial loss to Baran.

Large infrastructure projects have been cancelled, postponed or had
their scope changed by the Israeli Government, as a result of the economic slow
down, frequent changes in political strategies and dominant presence of
governmental entities in the infrastructure market. All the above factors may
adversely affect Barans operation and its ability to retain new projects.

The privatization and structural changes in
governmental companies process in the State of Israel is time consuming,
complicated and regulations laden.

Recent strategy to privatize large governmental companies has provoked
substantial union and labor disputes and may take considerable time. During the
interim period and until this process is implemented and operated, existing and
future infrastructure projects may be suspended or postponed.  Baran, as the largest private engineering
company in Israel, may be adversely affected by this process.

15

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Fluctuations in the Inflation rate in Israel
may cause economic instability.

In 2003 the inflation rate in Israel was (1.9)% as compared to 6.5%
inflation rate in 2002. The fluctuations in the inflation rate cause economic
instability, which results in customers sometimes being reluctant to work with
an Israeli entity. Loss of customers may significantly harm Barans business
and cause a decline in its revenues and in the price of its ordinary shares in
the public market.

Because Baran is a foreign private issuer, it
is required to provide less information to its shareholders than a United
States public issuer is required to provide.

As a foreign private issuer under the United States securities laws,
Baran currently is not subject to the proxy rules of Section 14 of the
Securities Exchange Act of 1934 (the Exchange Act). This means that Baran is
not obligated to provide proxy materials to its security holders, including
United States residents, in connection with annual and special meetings of
holders of Baran ordinary shares. In addition, the officers, directors and
principal shareholders of Baran are not subject to the insider short-swing
profits recovery and reporting obligations of Section 16 of the Exchange Act.
This means that the officers, directors and principal shareholders of Baran are
not required to report their transactions in the ordinary shares of Baran, nor
are they subject to potential short-swing trading liability to Baran if they
buy and sell Baran ordinary shares within a six-month period.

In addition, while foreign private issuers are required to file an
annual report on Form 20-F, which is comparable to the Annual Report on Form
10-K which United States public issuers are required to file, there is no form
for foreign private issuers comparable to the Quarterly Report on Form 10-Q
required to be filed by United States public issuers. A foreign private issuer
such as Baran is required to furnish material information regarding its
business and operations that it makes or is required to make public pursuant to
the law of the jurisdiction of its domicile or in which it is incorporated or
organized, or is required to file with a stock exchange on which its securities
are traded and which was made public by that exchange, or distributes or is
required to distribute to its security holders.

Barans US shareholders of record may have to
adjust to a new public market environment as a result of Barans resolution to
delist its ordinary shares from trade in the NASDAQ National Market.

A result of Barans resolution to delist its ordinary shares from trade
in the NASDAQ National Market and to continue to trade in the Tel-Aviv Stock
Exchange (hereunder, TASE), is that in the future, Baran shall make public
reports in accordance with the Israeli Securities and Exchange Committee rules
and regulations. This change may influence the US shareholders of record trade
practices. In spite of the fact that Baran believes the resolution to delist
its shares from trade in the Nasdaq, is for the benefit of both the company and
its shareholders, as explained in detail in Item 9, some US shareholders of
record may believe that the resolution adversely affects their rights, as they
will be required to adjust to the public market environment of the TASE, and
may take measures against the resolution.

16

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The termination of registration is a process
that shall become final as the SEC may determine, after Baran files Form 15
with the SEC.

Shareholders should be aware that in spite of the fact that Barans
duty to file any reports required under Section 13(a) and Section 15(d) of the
Securities Exchange Act of 1934 (the Act) shall be immediately suspended; the
termination of registration shall only take effect as the SEC may determine.
The termination process begins with Baran certification to the SEC on Form 15,
that the securities which are to be deregistered are held by less
than 300 holders of record worldwide.  Baran intends to file Form 15 with the SEC no
later than July 10, 2004.

Holding shares of a foreign issuer such as
Baran has certain tax and other implications.

Transactions in shares of a foreign issuer have tax implications that
do not exist when investing in shares of a domestic issuer. For example,
dividends paid by an Israeli company to shareholders residing outside Israel
are currently subject to withholding of Israeli income tax at a rate of up to 25%.
In the case of Baran, the applicable withholding tax rate will depend on the
particular facilities which have generated the earnings that are the source of
the dividend and, accordingly, the applicable rate may change from time to
time. The rate of tax withheld on Barans dividends has typically been 25%.
United States persons who become owners of Baran ordinary shares must include
the entire amount of any dividend paid by Baran with respect to Baran ordinary
shares (not reduced by any Israeli income taxes withheld) in their gross income
for United States federal income tax purposes. United States corporations
holding Baran ordinary shares will not be entitled to the 70% dividends
received deduction under the United States Internal Revenue Code. Residents of
the United States generally will have withholding tax in Israel deducted by
Baran from dividend payments. Such persons may be entitled to relief from
United States taxation under the Code, using the tax either as a reduction of
taxable income or as a dollar-for-dollar credit against United States tax
subject to limitations.

17

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Fluctuations in foreign currency exchange
rates could adversely affect Barans business.

A significant portion of Barans operating costs are incurred outside
the United States. Currently, most of Barans income is received and its costs
of operations are incurred in New Israeli Shekels. A growing number of projects
are taking place in Europe where Barans income is received and its costs of
operations are incurred in Euro. In fiscal 2003, Baran derived approximately
74% of its revenues from projects performed in Israel (most projects use NIS as
the functional currency), approximately 14% from the sale of products in the
United States (functional currency US$), approximately 10% from projects
performed in Europe (functional currency Euro), and approximately 2% from
projects performed globally (such as Thailand and South Africa). Most of the
expenses and revenues are incurred in NIS, US$ and Euro. Therefore fluctuations
in exchange rates between the currencies in which such costs are incurred and
the U.S. dollar may result in a decrease in revenues or an increase in
operating expenses as measured in U.S. dollars. In Israel, foreign currency
exchange rates have recently fluctuated significantly as compared to prior
years (the lowest rate in 2003 has been NIS 4.283 per $1 and the highest rate
has been NIS 4.924 per U.S. $1; the lowest rate in 2003 has been Euro 1.036 per
$1 and the highest rate has been Euro 1.259 Per U.S. $1). As a result of this
differential, from time to time Baran experiences increases in the costs of its
operations in Israel and Europe, as expressed in dollars, which could in the
future have a material adverse effect on the business, results of operations
and financial condition of Baran. Baran currently does not hedge its currency
exposure through the use of any financial instruments. The imposition of
exchange or price controls or other restrictions on the conversion of foreign
currencies could also have a material adverse effect on the business, results
of operations and financial condition of Baran.

Barans stock price has been and likely will
continue to be volatile, which may cause the value of your investment to
decline.

The market prices for securities of companies quoted on the Nasdaq
National Market, including Barans, have in the past been, and are likely to
continue in the future to be volatile. The Nasdaq Composite Index has declined
significantly since April 2000. As set forth in greater detail below see Item
9, the market price of Baran ordinary shares 
both in the Tel Aviv Stock Exchange and on the Nasdaq National Market
has been, and likely will continue to be subject to substantial volatility
depending upon many factors, many of which are beyond Barans control,
including:

| | announcements
  regarding the acquisition of technologies or companies by Baran or its
  competitors or by Barans customers;             
|- | ------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                           
| | technological
  innovations or new products developed by Baran or its competitors;                                                        
|  |                                                                                                                                           
| | issuance of
  new or changed securities analysts reports and/or recommendations applicable
  to Baran;                                   
|  |                                                                                                                                           
| | additions or
  departures of Barans key personnel;                                                                                       
|  |                                                                                                                                           
| | operating
  losses by Baran;                                                                                                              
|  |                                                                                                                                           
| | actual or
  anticipated fluctuations in Barans quarterly financial and operating results
  and degree of trading liquidity in its shares;

18

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| | continued
  economic uncertainty in Israel;                                             
|- | ----------------------------------------------------------------------------------------
|  |                                                                                         
| | continued
  instability in the Israeli and Middle East political and security situation.

One or more of these factors could significantly harm Barans business
or cause a decline in the price of its ordinary shares in the public market.
Securities class action litigation has often been brought against companies
following periods of volatility in their stock prices. Any securities
litigation claims brought against Baran could result in substantial expense and
divert managements attention from Barans business.

ITEM 4. INFORMATION ON THE COMPANY

History and Development of the Company

The Baran Group Ltd. was incorporated in Israel as a private company on
April 23, 1990. The
Baran Group Ltd. is a global provider of engineering, technology and
construction solutions.  The
Company offers fully integrated project services, from feasibility studies and planning, detailed engineering, procurement,
construction management, technology development up to complete turnkey project
and facility management. The Baran Group serves a broad range of markets
through four professional divisions: communications, industry, civil
engineering, and technology and services. Baran delivers creative and
unconventional solutions to complex and challenging projects and customizes
projects to clients real needs.Each division utilizes the services of a number of subsidiaries and/or
affiliated companies (please see a listing of such entities below). Barans
principal executive offices are located in the Baran House, 8 Omarim St.
Industrial Park, Omer 84965, Israel, and its telephone number is 972-8-6200-200
and its worldwide web site is located at www.barangroup.com.

On April 8, 1992, Baran registered its shares for trading on the Tel
Aviv Stock Exchange and raised approximately NIS 16.7 million (in 1992 $6
million) in an initial public offering of its shares. Following the initial
offering of its shares, Baran was involved primarily in providing engineering,
procurement and construction management services for various manufacturing
companies, and provided consulting and human resources services for the
day-to-day operations of existing plants. The proceeds raised in the initial public
offering of Barans shares allowed Baran to implement a strategic plan for
expanding its engineering activities as well as to develop expertise and
perform projects in new areas, such as infrastructure design and implementation
for the telecommunications industry and design and construction of
manufacturing facilities in the Semiconductors, biotechnology, pharmaceuticals,
petroleum and gas industries.

19

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Baran further implemented its strategic plan by establishing
subsidiaries and acquiring businesses specializing in the Groups fields of
operations, as well as other areas into which Baran decided to expand its
operations, and by investing in a variety of technologies and technology
ventures. Since 1992, Baran has considerably expanded its scope of operations.
In 1997 Baran was included in the Tel Aviv 100 index. In 2003 following a
decrease in the Companys profitability Baran was lowered to the Tel Aviv 150
index.

At the end of 1999, Baran underwent strategic internal restructuring,
pursuant to which it reorganized the Groups operations by separating its
various companies into six divisions with each division operating independently
under the instruction and supervision of that Groups management. As a result
of efficiency and focusing strategy on 2003 Baran gradually consolidated its
divisions into four divisions, namely Communications division, Civil
Engineering division, Industry division and Technology and Services division.

Baran plans to expand its operations both in the types of projects with
which it is involved and through geographical expansion. As to its first
objective, Baran intends to intensify its involvement in turnkey projects,
including those that are on a building, operation and transfer of ownership
(B.O.T.) basis and those that are on a building, operation and ownership
(B.O.O.) basis. As to its second objective, and in light of the substantial
reduction in overall investments in Israeli industry, Baran intends to expand
its international operations to approximately 40% of its total operations in
2004, compared with 26% in 2003 and approximately 29% in 2002. Baran plans to
perform projects in regions outside Israel, such as the Far East, Africa,
Eastern Europe and the United States. Baran, through its subsidiaries and
affiliates, is currently active in Germany, Thailand, Czech Republic, Romania,
South Africa, United Kingdom, the United States and several other countries,
the main developments are detailed below:

In November 2002, Baran completed its acquisition of o2wireless Solutions
Inc. a corporation existing under the laws of the State of Georgia. The
acquisition was structured as a merger and the surviving entity, o2wireless
d/b/a Baran Telecom (hereinafter Baran Telecom), maintains an office in
Atlanta, Georgia.

In the beginning of 2003, Baran acquired 50% of InTime Software Systems
Ltd. which specializes in providing solutions which improve customer
profitability and operating performance through expert systems, image analysis
systems and controls systems.  The
services offered by InTime Software are complementary to the services currently
rendered by Barans Industrial division.

In the beginning of 2003, Baran and two partners established Yesodot
Barniv Ltd., which specializes in the communications field and acts as a performing
contractor. Baran holds 80% of Yesodot Barniv Ltd.

In the last quarter of 2003
Baran established a wholly owned subsidiary in South Africa in the cellular
infrastructures field - Baran Raviv Telecom Africa Ltd. The subsidiary is currently in negotiation with potential
customers.

20

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During 2003 Baran was active in Romania by BMD as well as through a
self owned coordination office, which examined and evaluated a number of
projects in the industry and infrastructures field.  BMD, a partnership equally held by Baran, Malibu Israel Ltd. and
U. Dori Engineering Works Corporation Ltd., was established and registered
according to the Romanian Law, for the purpose of participation in engineering
projects in Romania.

During 2003 Baran established a Czech company- Techbar s.r.o to provide
engineering and design services for the construction of a production unit and
associated facilities for the active pharmaceutical ingredients (API) in the
Czech Republic.

During 2003 Nes Pan Ltd., which is held (50%) by Baran, entered, as a
partner, into a real estate project, which includes the construction of
dwelling units and commercial space in an area next to Lake Ontario in Toronto,
Canada.

In the last quarter of 2003, Nes Pan Ltd., which is held (50%) by Baran
has established, a limited liability company in Hungary- Mal-Nes Real Estate
Development Ltd. The Hungarian company engages in the development of a
residential project in Budapest.

As a result of its efforts to expand, Baran now has Representative
offices in Israel, the United States, England, Germany, South Africa, Canada,
Czech Republic, Hungary, The Netherlands, Romania and Thailand, and employs
approximately 1,454 individuals worldwide.

Business Overview

Baran is a global engineering and contracting firm and is a market
leader among Israeli companies that provide engineering services. Its core
business is providing engineering, construction, project management and
consulting services, either as full project and engineering solution on a
turnkey basis or as tailor-made engineering, procurement and construction
management services, to the telecommunications industry and various other
industry sectors. Since the end of 2003, Barans services are provided through
four divisions: Communications, Civil Engineering, Industry, and Technology
& Services.

| |  | The
  Communications division is a leading knowledge-driven solutions provider,
  specializing in the provision of fast, flexible and end-to-end turnkey
  rollout packages and full EPCM (engineering, procurement, construction and
  project management) services. The division delivers the full spectrum of
  engineering and management services required for the deployment of network
  infrastructures, telecommunication equipment installation and other
  telecommunication related projects in global markets. This division also
  provides outsourced integrated network solutions for the wireless
  telecommunications industry through the planning, designing, deployment,
  maintaining and optimizing of networks for wireless, wireless data and
  broadband.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21

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| |  | The Civil
  Engineering division provides construction management and supervision
  services for civil infrastructure, large buildings projects, and project
  management services for governmental sectors and institutions. The Civil
  Engineering Division engages in general construction projects on a turnkey
  basis, and specializes in providing services in the transportation area (such
  as seaports, airports, railways and train stations, roads and bridges),
  construction of military bases, security and defense infrastructures,
  production facilities and regional planning.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | The Industry
  division designs and implements projects from concept to completion,
  including turnkey project agreements. The Division serves a broad range of
  industries through several professional fields of expertise: Chemicals,
  Bio-Pharmaceutical, Food Industry, Water Treatment, Oil Refining &
  Petrochemicals, Natural Gas & LPG, Power Industry, Micro Electronics
  (semiconductor) and other industries.                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | The Technology
  and Services division develops, produces and sells original products
  and technologies developed by Baran subsidiaries. The divisions companies
  specialize in piezo-electric based HMIs (human machine interface), cellular
  parking systems, importing of crops and different substances that are used as
  raw materials in the animals and livestock food industry, developing and
  financing real estate projects such as malls, office buildings and
  build-to-suit communication base stations and providing industrial and
  management engineering consulting.       

Although Baran conducts its activities through separate divisions,
Barans management considers the divisions and the companies operating within
the divisions as an integrated, consolidated business deriving its revenues
primarily from consulting and engineering services. The division structure
merely affords Baran a convenient way to market its services based upon the
type of customer and the type of services being rendered. Baran does not
restrict the flow of funds or resources (including personnel) from one division
or company to another, except where a restriction is imposed under local legal
environment or tax laws.

The list below set forth Baran Groups subsidiaries, proportionately
consolidated companies, proportionately consolidated and associated companies,
as of June 20, 2004:

22

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BARAN GROUP LTD.

|Name of
  company                                                                                                             |  | Percentage
  shareholding
|----------------------------------------------------------------------------------------------------------------------------- |  | -------------------------
|                                                                                                                              |  |                          
|                                                                                                                              |  |                          
|Subsidiaries:                                                                                                                 |  |                          
|Baran Projects
  Construction Ltd. (Baran Construction)                                                                     |  | 100                      
|Baran Inbar Projects
  (1987) Ltd. (Inbar Projects)  99% owned directly and 1% owned through
  Baran Construction            |  | 100                      
|Baran Advanced
  Technologies (1986) Ltd. (Baran Technologies)                                                              |  | 100                      
|Baran Technology Products
  Management and Marketing Ltd. (Baran Management)                                                |  | 100                      
|Baran Industries (91) Ltd.
  (Baran Industries)                                                                             |  | 100                      
|Baran
  International Energies Ltd. (Baran Energies)                                                                        |  | 100                      
|Baran  Raviv Telecom Ltd.
  (Baran Raviv)  50% owned directly and 50% owned through Baran Construction                    |  | 100                      
|Yesodot Barniv Ltd.
  (since 2003)  through Baran Raviv Telecom                                                              |  | 80                       
|Baran
  Infrastructure &
  Construction Ltd. (Baran
  Infrastructure)                                                       |  | 100                      
|Baran Engineering and
  Projects (1983) Ltd. (Baran Engineering)
       (formerly  Baran Petrochemical Engineering
  Ltd.) |  | 100                      
|Enco Projects Systems
  (1997) Ltd. (Enco) - through Baran Industries                                                       |  | 100                      
|A. Etzion Consultants and
  Engineers Ltd. (A. Etzion) - through Enco                                                       |  | 100                      
|Mobipower Ltd.                                                                                                                |  | 63.64                    
|InTime - Software Systems
  LTD. - through Baran Engineering (since 2003)                                                     |  | 50                       
|Mobipower B.V.  through
  Mobipower Ltd.                                                                                     |  | 100                      
|B & W Projects Inc.
  (B&W)                                                                                                 |  | 100                      
|Barantec Inc. (Barantec)
  - through Baran Technologies                                                                     |  | 100                      
|Notev Management and
  Operation Ltd. (Notev)                                                                               |  | 100                      
|Industrial Centers E.O.D.
  Ltd. (E.O.D.) - through Baran Energies                                                          |  | 50 (3)                   
|Baran Group B.V. (Group
  B.V.) - through Baran Group                                                                       |  | 100                      
|Baran Raviv (Netherlands)
  International B.V. (Baran Raviv B.V.) - through Baran Raviv                                     |  | 100                      
|Baran Raviv GmbH  through
  Baran Raviv B.V.                                                                                 |  | 100                      
|LEAD Control Ltd.                                                                                                             |  | 50.1                     
|Westmontage
  Kabel und Netzwerk GmbH (Westmontage) - through Group B.V.                                                    |  | 54.9                     
|Baran Raviv Telecom Africa
   through Baran Raviv                                                                            |  | 100                      
|**Baran Raviv Telecom
  (Thailand) Limited - through Group B.V.                                                               |  | 100                      
|O2wireless d\b\a Baran
  Telecom( Baran Telecom)                                                                            |  | 100                      
|*Techbar s.r.o  through Baran Engineering                                                                                    |  | 100                      
|Proportionately
  Consolidated Companies:                                                                                     |  |                          
|Baran Alrig Limited                                                                                                           |  | 50                       
|Nes-Pan Ltd. (Nes-Pan) -
  through Baran Management                                                                         |  | 50                       
|A.R.  A.D.Y.R.
  Constructions Ltd. (A.R.  A.D.I.R.)                                                                      |  | 50                       
|Meissner Baran Ltd.
  (Meissner Baran) - through Baran Industries                                                           |  | 46.5 (1)                 
|Green Anchors Ltd. 
  through Nes Pan                                                                                        |  | 25                       
|Carmel Desalination
  Limited                                                                                                 |  | 33                       
|*BMD Design and Infrastructure LLC  through
  Baran Construction                                                             |  | 33                       
|*Nes Pan Harbourfront  through Nes Pan Canada                                                                                |  | 50                       
|Mal Nes KFT  through Nes
  Pan                                                                                               |  | 22.5                     
|*Nes Pan Canada Investments Inc.  through
  Nes Pan                                                                          |  | 50                       
|Associated
  Companies:                                                                                                       |  |                          
|Tefen Industrial
  Engineering and System Analysis Ltd. (Tefen) - through Baran Industries                                  |  | 31.29                    
|A.L.D  Advanced Logistics
  Developments Ltd. (A.L.D.)                                                                     |  | 50.5 (2)                 

*
Companys activity will be included in the 2004 financial statements.

23

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**
As of January 1, 2004, held through Baran Raviv Telecom Ltd.

|(1) | Percentage of control 
  60%.                                                       
|--- | -------------------------------------------------------------------------------------
|(2) | Percentage of control 
  50%. Baran sold all its
  holdings in A.L.D on May 25, 2004
|(3) | Percentage of control 
  33.3%                                                      

Services Provided by Baran

Baran
offers its customers engineering and consulting services, which can be divided
into three main categories:

| |  | Engineering,
  Procurement and Construction Management (EPCM) Services. This category
  includes engineering services, procurement services, and construction management
  services. Engineering services include preparing engineering drawings and
  designs for large-scale process-oriented production facilities, as well as
  providing process engineering, civil engineering, electrical engineering,
  piping design, equipment design, mechanical engineering and other types of
  specific engineering services. Procurement services include performing cost
  and other comparisons for assisting customers in selecting subcontractors and
  suppliers, preparing proposal and bid documentation for subcontractors and
  suppliers and providing technical assistance for the placement of orders.
  Construction management services include coordination between the various
  elements of the project, supervision of suppliers and contractors, scheduling
  construction, maintenance and other activities, budget control, site
  management, quantities inspection, invoice approval, and commissioning and
  certification. The actual services provided under this category may vary and
  are tailored to the specific project and customers requirements. Baran
  provides its customers with end-to-end solutions to implement their projects,
  while allowing the customer to maintain a direct legal relationship with its
  subcontractors and suppliers.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Turnkey
  Services. This category provides the customer with a complete end-to-end
  solution for implementing complicated projects based on the customers
  requirements. In providing these services, Baran serves as a single contact
  point for the customer on all aspects of a project, from its design and
  planning through its construction, commissioning and timely delivery, and
  retains all required services from subcontractors and suppliers. When
  providing turnkey services, Baran typically is responsible for the quality of
  work performed by the subcontractors and the materials provided by the
  suppliers. Baran also provides warranties for materials supplied and work
  performed for a predetermined period of time (normally between 12 and 24
  months from the date of delivery of the project). Usually Baran obtains
  back-to-back warranties from its suppliers and subcontractors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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| |  | Outsourced
  Engineering Services. Baran outsourced teams of engineers and technicians to
  customers to assist their in-house workforces on specific projects or
  assignments. Typically, the customers manage and supervise the assigned
  teams. All services are provided under framework agreements that stipulate
  the period of time during which the services will be provided. Contract
  periods generally range between several months and several years. The prices
  for these services often are based upon hourly rates. The services provided
  by Baran in the framework of each project are tailored to meet the specific
  needs of the customer and may consist of any combination of services included
  in the above categories. Subsidiaries of Baran which provide such services
  are ISO 9001 certified.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Breakdown of Revenues by Type of Service

EPCM services generally produce gross margins between 17% and 29%,
outsourced services typically produce gross margins between 12% and 19% and
turnkey services generally produce gross margins between 7% and 14%.  Even though turnkey services generate lower
margins than the other two types of services it provides, Baran has placed more
emphasis on turnkey projects in recent years, due to the fact, that the overall
profit generated from turnkey projects is generally higher than the overall
profit derived from EPCM and outsourced services. The general slow down in
Barans activity and the acute competition in the markets Baran operates in,
resulted in a decrease in Barans profitability rate driven from all the type
of services.

Geographical Breakdown

In fiscal 2003, Baran derived approximately 74% of its revenues from
projects performed in Israel, approximately 10% from projects performed in
Europe, approximately 14% from the sale of products in the United States, and
approximately 2% from projects performed all over (such as Thailand and South
Africa)  In fiscal 2002, Baran derived
approximately 71% of its revenues from projects performed in Israel,
approximately 21% from projects performed in Europe, approximately 4% from the
sale of products in the United States, and approximately 4% from projects
performed in Thailand. In fiscal 2001, Baran derived approximately 91% of its revenues
from projects in Israel, approximately 8.5% from projects in Europe and
approximately 0.5% from sale of products in the United States. In fiscal years
2000 and 1999, Baran derived approximately 98-99% of its revenues from projects
in Israel. This increase in the scope of activity outside of Israel is
attributable primarily to implementation of a strategic policy adopted by the
Groups management to expand the Groups global activities.

Baran believes there is substantial potential for growth of its
business outside of Israel.  In the past
years three (3) Baran has taken steps to expand its activities outside of
Israel. Today, Baran is a worldwide company, which renders services in Asia,
Europe, Africa and North America. Baran intends to seek to continue to expand
its operations outside Israel and believes that in the foreseeable future the
revenues it derives from activities outside of Israel will exceed those derived
within Israel.

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Competition

There are a number of engineering companies that operate in Israel and
provide services of the kind provided by Baran. These competitors include Ludan
Engineering Co., Tahal Consulting Engineers Ltd. and Bateman Projects (1993)
Ltd. Internationally, there are a number of engineering companies that are substantially
larger than Baran, including Bechtel Group, Ltd., Tetra Tech Inc., CH2M Hill
Companies Ltd., Camp Dresser & McKee Inc., URS Corporation, and AECOM
Technology Corporation. However, Baran believes that its extensive engineering
capabilities, coupled with its excellent workforce, place Baran in a position
to successfully compete in the area of engineering services for relevant
projects around the world. There are many other companies in Israel and in the
United States that provide services in the consulting areas in which Baran
operates, including, Aman Organization and Management Sciences Consultants
Ltd., Relex Software Corporation, Mashik Business Promotion Research &
Methods Ltd., Aviv Management Engineering & Information Systems Ltd.,
Dialog-Organizational, Development & Training Ltd., Program Logistics
Systems Ltd., Tetra Tech, Inc., Camp Dresser & McKee Inc., and AECOM
Technology Corporation. Many other companies in Israel provide services of the
kind provided by Baran Raviv Telecom Ltd. Significant Israeli competitors of
the communications division are the subsidiaries of H. Mar Industries Ltd.
Internationally, there are many companies that provide services of the kind
provided by the Communications division, including Bechtel Group, Inc., Tetra
Tech, Inc., Camp Dresser & McKee Inc., and Quanta Services, Inc.

The network infrastructure services marketplace in the US is highly
competitive. Numerous network infrastructure services providers offer services
and solutions comparable to those provided by Baran Telecom The ongoing
introduction of new technologies and products, new alternatives for the
delivery of wireless voice and data services, and regulation foster a dynamic,
rapidly changing environment. Growth in wireless customers and voice traffic on
wireless networks, introduction of new technologies, the cost and timing of
implementing those technologies, the availability and cost of capital to
finance network expansion, regulation, and general economic conditions all
influence demand for network infrastructure services. These conditions have a
significant effect on competitive conditions and the success of market
participants, including Baran Telecom.

In most markets in which Baran Telecom operates, we compete with:

| |  | Wireless
  carriers and tower companies, and equipment suppliers who employ in-house
  personnel to provide network infrastructure services;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | Local,
  national, and multi-national engineering firms;                                                                                    
| |  | Larger
  companies serving regional, national, and international markets; and                                                               
| |  | Smaller
  companies providing specialized services to local markets.                                                                        

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Baran Telecom competes for new projects based primarily on its ability
to deliver a full range of network infrastructure services at competitive
prices. Baran Telecom strives to capture new business opportunities by offering
competitively priced package of services that provide our customers a single
source for several services. An example for such package is the EPCM services
Baran offers to its customers. In this way Baran Telecom can offer customers
economies and efficiencies that may be lost when one supplier provides
engineering services, another site development services, and a third
construction services. There are a number of communication companies that
operate in US and provide services of the kind provided by Baran Telecom. These
competitors include: AFL Telecommunications, Wireless Facilities Inc., LCC
International, SBA Communications Corporation and Tetra Tech.

Dependence on Suppliers and Customers

Baran is not dependent on a single supplier or customer, mainly due to
the variety and geographical locations of its activities. However, every year
Baran performs large- scale projects for a limited number of customers that
comprise a significant portion of Barans revenues and net income. In the
fiscal 2003, Barans main customers that comprised approximately 10% of Barans
aggregate revenues. Aggregate revenues from Barans three major customers
constituted approximately 21% and 55% of Barans aggregate revenues for fiscal
2002 and fiscal 2001 respectively. The decrease in the percentage of aggregate
revenues from major customers is attributable primarily to the termination of a
large-scale project performed for a major customer of the Communications
division, and to the completion of a large-scale project performed for a major
customer in the Semiconductors division.

Organizational Structure and Main Activities
of Each Division

Communications
Division

The Communications division employs extensive know-how and experience
in providing fast rollout turnkey solutions and engineering services for
planning, designing and deployment of telecommunication network
infrastructures, installation of telecommunications equipment and other
telecommunications-related projects in the global telecommunication markets.
Baran provides integrated network solutions for large-scale infrastructure
projects in the fields of cellular networks, microwave backbone networks,
metropolitan line networks, switches and communication centers and control
hubs. This division offers its customers comprehensive end-to-end solutions and
services covering every aspect of the project, from project definition to
feasibility studies, design and engineering, site acquisition, zoning,
permitting, construction, equipment installation, commissioning, integration
and maintenance. This division also provides outsourced integrated network
solutions to the telecommunications industry. Its services include network
planning, design, deployment and maintenance. It customizes its services to fit
individual customer needs by offering both bundled and unbundled network
solutions.

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The Communications division Headquarters office is in Atlanta, GA USA.
The largest company in the division is Baran Telecom, a US based company,
established in November 2002 when Baran acquired o2wireless Solutions Inc. This
division also maintains offices in Israel, Germany, the Asian Pacific region
and in South Africa in order to provide services to its customers worldwide.
Baran Raviv Ltd., the Israel based company, was the first company within the
division, and most of the know-how was created in that subsidiary. It maintains
three offices within Israel. The German office was established through the
acquisition, in September 2001, of Westmontage Kable und Netzwerk GmbH, a
leading German company with over 40 years of experience in the communications
infrastructure market. The Asian-Pacific offices were established in Thailand
through the incorporation in March 2002 of Baran Raviv Thailand.

In Israel, the Communications division provides a wide range of
services to all three cellular carriers: Partner Communications Company Ltd.,
Cellcom Israel Ltd. and Pelephone Communications Ltd. During the year 2001, the
Communications division completed a turnkey project for nationwide deployment
of DBS Satellite Services. The project included establishing the first
satellite TV infrastructure layout and customer service centers in the country
and generated more than NIS 935.3 ($197.5 million) in revenues over two years.
The Communications division is engaged in a project for the implementation of
the infrastructure for Partner Communications Company Ltd.s Global System for
Mobile Communication (GSM) network in Israel. Baran Raviv Ltd is engaged in
long-term projects with the IDF and other Government based agencies for which
it provides Telecommunication Infrastructure services. Internationally, the
division had been engaged, during 2003, with 3 German carriers, including
Vodafone and Deutsche Telekom to provide infrastructure for their new UMTS
networks in Germany.  In Thailand, Baran
Raviv Telecom (Thailand) Ltd., had been engaged with 3 wireless carriers to
perform new cell sites implementation.

Baran Telecom had been engaged in 2003 by several wireless carriers,
including Verizon, Nextel Communications, T-Mobile and AT&T wireless to
provide a variety of telecommunication services across the US.

In addition, the division performed turnkey projects for Palestinian
Telecommunications Co. PLC, the telecommunication provider in the Palestinian
Authority, BASE (formerly known as KPN-Orange Ltd.) in Belgium, and turnkey
projects for two of the cellular operators in Turkey. In addition to achieving
a strong track record of numerous large-scale projects, this division has
established long-term business relationships with leading international
companies such as Deutsche Telekom AG, Alcatel Telecom Israel Ltd., Siemens AG,
Arcor AG &Co., Ericsson and Nokia. Baran is qualified as an approved
subcontractor of those entities and either currently performs, or has in the
past, work for those entities. In the last quarter of 2003 Baran established a
wholly owned subsidiary in South Africa in the cellular infrastructures field -
Baran Raviv Telecom Africa Ltd.
The subsidiary is currently in negotiation with potential customers.

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Civil Engineering
Division

The Civil Engineering division primarily provides construction
management, coordination and supervision services in civil infrastructure and
construction projects, as well as project management services for governmental
agencies and institutions. This division engages in general construction
projects on a turnkey basis and specializes in providing services in the
transportation area (such as seaports, airports, railways and train stations,
roads and bridges), construction of military bases, security and defense
infrastructures, energy centers, medical centers, laboratories and regional
planning.

The division is currently involved through its subsidiary A.R.-
A.D.Y.R. Constructions Ltd. in the management and supervision of the
construction of the Millennium Seaport in Ashdod, Israel.  The Division is expected to generate
approximately NIS 5-6 million ($1.14-1.37 million) per year for its services, in
the coming four years. The project, which commenced in 1997, was planned as a
five-year period project and is predicted to continue for additional four more
years.

Baran also has a one-third interest in a joint venture for the
establishment of the Nachshonim project, a turnkey project for the
construction of a modern military base designed to serve as a dry storage
facility for the Israeli Defense Forces. Baran expected to generate
approximately NIS 186.8 million ($42.7 million) in revenue from the project
over a three-year period commencing 2001. The Nachshonim project was expected
to be completed within three years, however the joint venture believes that an
additional year is required for completion of the project. If the joint venture
fails to complete the project within the time specified in the agreement,
without the clients consent, it shall be subject to substantial fines.
Therefore, the joint venture submitted a Change Order request for an extension
it believes is required for completing the project. The project management
estimates that the likelihood of obtaining the additional extension is
probable.During the last third of 2003, severe and extensive engineering difficulties
were discovered.  Accordingly, in the
last quarter of 2003, the joint venture recorded an accrual for additional
costs in the project which resulted in a loss of $1.4 million to Baran. Further
developments during the first quarter of 2004 lead the partners to reassess the
expected results of the project.  The
projects budget now indicates a loss of $15 million; accordingly Baran shall
record a gross loss of one third (1/3) of the loss in the 2004 financial
statements. The joint venture believes it has insurance coverage for this kind
of events, as well as ability to obtain Change Order requests approval, however
currently the joint venture can not determine to what extent (whether full or
partial), the additional costs will be recovered by the insurance company, or
whether or not the requested Change Order shall be approved. Therefore no
income of such funds was recorded at this stage (for additional information see
Note 11 of the financial statements).

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Other customers of the Civil Engineering division include the Israeli
Ministry of Defense, the Israeli Ministry of Industry and Trade, the Israeli
Ministry of Housing and Construction, the Israeli Railways Authority, the
Israeli Department of Public Works (Maatz), the Israel Police Force, the Israel
Lands Administration, the Israeli Prison Service, Maccabi Healthcare Services
and leading food chains in Israel.

During 2003 Baran was active in Romania through BMD as well as through
a self owned coordination office, which examined and evaluated a number of
projects in the industry and infrastructures field.  BMD, a partnership equally held by Baran, Malibu Israel Ltd. and
U. Dori Engineering Works Corporation Ltd, was established and registered
according to the Romanian Law, for the purpose of participation in engineering
projects in Romania.

On July 4, 2003, the Romanian Ministry of Transportation, Constructions
and Tourism announced that BMD had won the exclusive right to negotiate the
performance of a bid for the construction and operation of approximately 13
kilometers, four lanes and four bridge highway in Romania. Currently, BMD
signed a letter of intent with the Romanian Ministry of Transportation and
negotiations to complete the construction and operation agreement are under
way. The construction of the project shall be accomplished within approximately
two years and BMD will be granted the right to operate the Project for ten
years. The estimated cost of the Project construction is approximately 25
million Euro ($30 million)) and the expected income is approximately 46 million
Euro ($57 million), during 10 years, commencing after completing the construction
of the highway. BMD shall be responsible for all the operating costs accrued
during the 10 years period and the Romanian Ministry of transportation shall
guaranty a minimum traffic volume, all in accordance with the construction and
operation agreement that will be signed.

Industry Division

The Industry division offers global engineering and detailed design
services. This division is divided into seven profit centers in the following
fields of operation: chemistry industry; petrochemicals industry; infrastructure
of water desalination, natural gas, energy and energy generation; hi-technology
industry pharmaceutical, biotechnology and electronics; control and expert
systems; project implementation, operation and maintenance and implementation
of engineering projects.  The division
consists, among others, of the following companies, all of which are direct or
indirect wholly-owned subsidiaries of Baran, except for Lead Control Ltd.,
which is 50.1% owned and InTime  Software Systems Ltd, which is 50% owned:

| |  | Baran
  Engineering & Projects (1983) Ltd. is a multidisciplinary company
  providing engineering, procurement and construction management services and
  performing projects on a turnkey basis for process oriented industries. This
  subsidiary performs services primarily in the central and southern regions of
  Israel.                                                
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Baran
  Energies International Ltd. is an engineering company specializing in the
  fields of refining, petrochemicals, natural gas and electricity production as
  well as in other energy-related areas. It has executed projects outside
  Israel and provides a full range of global engineering and project management
  services in cooperation with other Baran entities.

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| |  | Baran Inbar
  Projects (1987) Ltd. is a multidisciplinary engineering company providing
  engineering, procurement and construction management services for industrial
  projects.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Baran
  Industries (91) Ltd. usually acts as a turnkey contractor with general
  responsibility for projects in the high-technology industry, pharmaceutical
  industry, biotechnology and electronics industries and in process-oriented
  industries. It also specializes in providing a full complement of design and
  construction management services for clean rooms environment and other
  complex industrial systems.                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Notev
  Management & Operation Ltd. provides outsourcing operational services,
  production management, maintenance, quality engineering and safety and
  logistics management.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Lead Control
  Ltd. is a global provider of design and implementation services as well as a
  product developer for automation and control systems for the oil, gas, water,
  chemicals, pharmaceuticals and biotechnology industries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Meissner-Baran
  is a semiconductor company, which has been involved in the formation,
  engineering, construction and commissioning of the Tower Semiconductors FAB2
  Plant in Migdal HaEmek, Israel. The contract with Tower Semiconductors will
  be executed in the following three stages to be implemented in accordance
  with Tower Semiconductors decisions: Stage A- Design and receipt of building
  approval; Stage B- Planning and construction of new plant; Stage C-
  Completion of plant full capacity. Stages A and B were completed by December
  31, 2002. In February 2003, the agreement with Tower Semiconductors was
  amended, stipulating, among other things, that Stage C would be executed in
  five subsequent sub-phases total $35.8 million. As of December 31, 2003
  Meissner-Baran is in the process of executing the second sub-phase.
| |  | InTime 
  Software Systems Ltd. provides an expert system and image analysis system and
  control system to help the process industries improve their profitability and
  operating performance. In addition, InTime  Software Systems Ltd. is an
  official distributor and solution partner of Gensym a leading supplier of
  software for expert systems.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Techbar
  s.r.o provides engineering and design services for the construction of a
  production unit and associated objects for the active pharmaceutical
  ingredients (API) in the Czech Republic. The project may reach an approximate
  scope of over EUR 2.5 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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One of the Industry divisions companies together with two other
leading companies, Dor Chemicals Ltd. and Ionics Ltd established a company,
named Carmel Desalination Ltd. (hereunder CDL) In August 2002, the company
won a bid for the planning, construction, operation and maintenance of a
desalination plant in Haifa, Israel. The expected scope of the project was
approximately NIS 450 million ($100 million). The facility was planed to be one
of 7 desalination facilities built along the Mediterranean shores of Israel,
with desalination capacities ranging from 10 to 100 million m3/year.
The CDL facility was planed to desalinate 30 million m3/year, the
construction phase was supposed to take 2.5 years. CDL was to be granted the
franchise to desalinate and sell the desalinated water for a period of 25 years
and the state of Israel was obliged under the contract to purchase a certain
portion of the desalinated water. However construction of the majority of the
planed facilities has not commenced due to changes in financial and regulatory
circumstances. On April 1st, 2004, CDL, received a letter from the
Israeli Water Desalination Governmental Authority (hereunder, the WDA)
in which the WDA notified CDL of the termination of the Desalination Facility
BOO Agreement dated October 28th, 2002 (hereunder, the Agreement). In the letter, the WDA
claims that the termination is due to CDLs breach of obligations contained in
the Agreement, including CDLs failure to execute financing agreements.

The WDA further announced that it intends to collect the Performance
Bond issued to it by CDL. The Bond on the sum of NIS 35 million ($7.78 million)
(Barans share of the Performance Bond is NIS 11.67 million ($2.59 million))
was forfeited on May 2nd, 2004. CDL rejects all the allegations made
against it and intends to use all applicable legal measures against WDA. CDL
and the WDA have already entered an arbitration process in the matter.  Barans legal counsel is of the opinion that
CDL has good legal arguments against WDA. The estimated costs for Baran in the
project to date, which were recorded in the financial statements, are NIS 5
million ($1.14 million) for further information, see Note 11 of the Financial
Statements.

The Industry division is part of a consortium composed of Baran and
Ionics Inc. in equal parts, which was announced by Mekorot the Water Company
Ltd. (the Israeli National Water Company), as the exclusive winner of the
tender for the construction of a water desalination facility in Ashdod, Israel.
The project will be erected on a Turn-Key basis and its construction cost is
approximately $95 million. The construction of the project should be completed
within approximately two years The desalination facility is planed to
desalinate 30 million m3/year, using reverse osmosis technique.  However, as a result of structural changes
in Mekorot, which took place during the end of 2003 continuing through 2004,
the project is suspended for the time being. The current expectation is that
this problem will be resolved within 3 to 6 months. The estimated costs of the
project to date, which were recorded in the financial statements, are
approximately NIS 4 million ($0.9 million). The consortium gave Mekorot a $5
million Bid bond which is expected to be replaced by a $9 million performance
bond upon the projects commencement.

The Industry division performs an engineering design and permitting
issuance process of the natural gas transportation system projects in Israel,
which have been initiated in 2003 and shall continue during 2004. Baran has won
several bids for the detailed engineering design and permitting issuance
process of more than 100 Kilometers of on-shore gas transportation lines. In
addition Baran has performed permitting issuance process of more than 130
Kilometers of marine (off-shore) gas transportation lines and detailed
engineering design and permitting issuance process of 4 off-shore entries. The
overall scope of the projects is approximately $5.5 million and Baran has
partners in some of the projects.

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Technology and
Services Division

The Technology and Services division includes companies that are
engaged in the design and production of products based on piezo-electric
switches, the development of parking systems utilizing cellular networks,
import of crops and different substances that are used as raw materials in the
animals and livestock food industry and recycling of organic waste into
livestock feed. In this division Baran operates through, among other subsidiaries
and affiliates, the following companies:

| |  | Baran Advanced Technologies (1986) Ltd.
  develops produces and markets sophisticated, weather-proof, durable keyboards
  for a variety of applications.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mobipower Ltd. was founded in 1997 to market
  a proprietary cellular parking system known as Mobipower for which it has
  obtained a worldwide license. This system utilizes an existing cellular
  network to allow municipalities to manage their parking demands. It
  eliminates the need for conventional supervision, payment and parking
  enforcement methods, by providing an in-vehicle user-friendly system of
  parking fee collection.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Barantec Inc., a wholly-owned subsidiary of
  Baran Advanced Technologies (1986) Ltd., is a technology sales and marketing
  company based in New Jersey. The company primarily markets and sells the
  access control systems and the Everswitch solution, all manufactured by its
  parent company, as well as the Mobipower cellular parking system.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Industrial Centers E.O.D Ltd. is active in the area of importation,
  marketing and distribution of various raw materials (especially grains) that
  are used in the Israeli feed industry. The company owns a plant for recycling
  organic waste and selling it as animal feed, and is a leading company
  in Israel in this field.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Nes-Pan Ltd. specializes in developing,
  financing and operating real estate projects, such as commercial malls and
  office buildings for rent and build-to-suit base stations. Nes-Pan Ltd.
  acquired from Azorim Investments in Construction and Development Ltd. half of
  its land development rights in a 24,000 square meter plot in Beit Dagan,
  Israel. Together they formed the Ezorie- Dagan partnership (50% Nes Pan and
  50% Azorim Investments in Construction and Development Ltd.), which leads a
  commercial office space project. So far part of the land development rights
  were used and 10,400 square meters of office space was built. Subject to
  completion of several formal procedures required by the Israeli Land
  Authority, the Ezorie- Dagan partnership will sign a lease agreement for 49
  years with an option to extend the lease for an additional 50 years
  period.  Part of this office space,
  was leased by Baran and its subsidiaries, and serves as regional center for Barans
  activities.

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| |   | Nes-Pan is
  also the owner of a commercial mall in Beer Sheva, Israel, that is currently
  being leased to unrelated tenants and generates annual revenues of
  approximately NIS 13 million (US $ 2.8 million).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | During 2003
  Nes Pan Ltd., has entered, as a partner, into a real estate project in
  Toronto Canada. The project includes the construction of approximately 470
  dwelling units and commercial space in an area next to Lake Ontario in
  Toronto, Canada that consist of 42,000 sqf. The value of the project is
  approximately 95 million Canadian Dollars (US $70 million). Nes Pans Ltd.
  share in the project shall be 45% (consequently Barans share is 22.5%) and
  50% in the control of the project; 45% of the project is held by another
  Israeli company and the remaining 10% is held by an American financial
  investor. Additionally, Nes Pan Ltd. (45%) together with Malibu Israel Ltd.
  (45%) and Ostansia Ltd. (10%) has established a limited liability company in
  Hungary, Mal-Nes Real Estate Development Ltd. The activity of the Hungarian
  company consists of the development of a residential project of 160
  apartments, parking and storage space. The property is registered with the
  Land Registration Office for District of Budapest and consists of
  approximately 4,300 sqm.
| |  | Baran Industries (91) Ltd. signed an
  agreement with a third party for the establishment of a joint venture in
  order to execute a NIS 95.9 million ($20.2 million) project, on a cost-plus
  basis for the planning, construction and maintenance of approximately 17,500
  square meters of commercial office space in Beit- Dagan near Tel-Aviv. The
  joint venture completed the building of 10,400 square meters of office space
  in the project and leased part of it to Baran and its subsidiaries that use
  the space as its regional center.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Green Anchors Ltd. was founded at the end of
  2001 to manage and maintain telecommunication sites and base stations, which
  it owns and leases to wireless communication carriers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

Additionally, the Technology and Services division provides consulting
services in the fields of industrial and management engineering, plant
administration, and quality control and logistics. The division performs most
of its activities in Europe and the United States. Tefen Industrial Engineering
Management and Systems Analysis Ltd. and its subsidiaries, the most prominent
company in this division, provide consulting services in the fields of
industrial management engineering and plant administration. Tefen offers its
clients in the semiconductors, communications, electronics and pharmaceutical
industries comprehensive consulting services from the inception of the business
through construction and operations. Tefen also offers a variety of consulting
services, such as identifying, prioritizing and implementing performance
improvement opportunities, with the goal of achieving more efficient
utilization of resources, increasing profitability, and improving service
levels. The Technology and Services division conducts substantially all of its
activities outside Israel, through subsidiaries in the United States (Tefen
U.S.A. Inc.) and England (Tefen U.K.). Tefens shares are traded on the Tel
Aviv Stock Exchange. Baran owns 31.29% of the shares conferring a right to
dividends in Tefen and 40% of shares conferring voting rights.

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A.L.D Advanced Logistics Development Ltd. and its subsidiaries, another
significant member of the Technology and Services division, is a leading
consulting firm and software company in the fields of reliability and quality
assurance testing, software testing and professional training for commercial
and military clients. Since 1984, Advanced Logistics has been engaged in
developing software tools that provide solutions for assessment of reliability
and quality of manufacturing processes and systems, during the development and
manufacturing process. Its software tools facilitate the scientific forecasting
of system failures and the formation of recommendations for improvement of
development and manufacturing processes. Advanced Logistics shares are traded
on the Tel Aviv Stock Exchange. Baran owns 50.5% of the shares conferring a
right to dividends in A.L.D, and 33.33% of shares conferring voting rights.

On May 31, 2004 Baran sold its holdings in A.L.D for consideration in
the sum of $1.65 million. Baran resolution to sell its holdings in A.L.D
resulted from the fact that A.L.Ds activity is external to Barans core
business scope. The above sale is in consistence with Barans policy as of mid
2003, to focus Barans activity on its core business, i.e. engineering, technology and construction
solutions global services and following reduce in none engineering
activities.

The following diagram summarizes the ownership interests in Baran Group
Ltd., as of the date of this Annual Report:

---

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Properties

| |  | Since 1997,
  Baran - Industries (91) Ltd., a wholly-owned subsidiary of Baran, has leased
  from the Israeli Lands Authority a 6,400 square meter plot in the industrial
  area in Omer, Israel, where Barans headquarters in Southern Israel are
  located, in a 5,200 square meter facility. The lease is for a period of 49
  years. The construction has been completed and Baran completed the
  registration of its title in the property.                                                                                                                                                                                                                                                                                
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Baran signed
  a development agreement with the Israeli Lands Authority regarding a 5,080
  square meter plot in the industrial area in Omer, Israel.  Pursuant to the agreement, Baran has to
  satisfy certain construction milestones and complete construction of a 2,032
  square meter facility by April 1, 2002 (with additional rights to build up to
  4,572 square meters). A request for extension of time has been submitted to
  the Israeli Land Authority; However the Israeli Land Authority has not yet
  replied. Once all conditions are met and construction is completed, Baran
  expects to sign a lease agreement for 49 years.                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Nes-Pan Ltd.
  acquired from Azorim Investments in Construction and Development Ltd. half of
  its land development rights in a 24,000 square meter plot in Beit Dagan,
  Israel. Together they formed the Ezorie- Dagan partnership (50% Nes Pan and
  50% Azorim Investments in Construction and Development Ltd.), which leads a
  commercial office space project. So far part of the land development rights
  were used and 10,400 square meters of office space was built. Subject to completion
  of several formal procedures required by the Israeli Land Authority the
  Ezorie- Dagan partnership will sign a lease agreement for 49 years with an
  option to extend the lease for an additional 50 years period.

35

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| |  | Baran, its
  subsidiaries and affiliated companies lease an office space of approximately
  10,000 square meters in Beit Dagan, Ezorie Dagan project, which serves as
  Barans regional center.                                                                                                                                                                                                                         
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Advanced
  Logistics Development Ltd. owns and conducts its operations from a building
  of 700 square meters in the industrial zone in Rishon LeZion, Israel.                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Westmontage
  Kable und Netzwerk GmbH, an indirect majority-owned subsidiary of Baran, owns
  a 7,000 square meter plot in Essen, Germany, on which an 850 square meter
  office building is located, from which it conducts its operations.                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Baran
  Telecoms principal executive offices are located in approximately 11,000
  square feet of office space in Cumming, Georgia. The lease for this space
  expires in December 2005. Baran Telecom also leases office and, in some
  instances, warehouse space in California, Georgia, Kentucky, Maryland, North
  Carolina and Texas. The leases on these spaces expire at various times
  through November, 2004.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Barans main
  offices in North America are located in approximately 44 square meter of
  office space in Manhattan, New York. The lease for this space expires in June
  2005.                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Nes Pan
  Ltd., owns 45% of a 42,000 sqf real estate property next to Lake Ontario in
  Toronto, Canada. A construction of approximately 470 dwelling units and
  commercial space shall be built on this property.                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Nes Pan Ltd,
  is also the owner of a commercial mall in Beer Sheva, Israel, that is
  currently being leased to unrelated tenants and generates annual revenues of
  approximately NIS 13 million (US $2.8 million).                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Nes Pan Ltd.
  owns 45% of 4,300 square meters real estate property in Budapest Hungary. A
  construction of 160 apartments, parking and storage space is planned to be
  built on this property.                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Other subsidiaries
  of Baran hold a leasehold interest in number of other buildings, as required
  for their ordinary operation.                                                                                                                                                                                                                                                                                        

36

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ITEM 5. OPERATING AND FINANCIAL REVIEW AND
PROSPECTS

Cautionary Notice Regarding Forward-Looking
Statements

The following managements discussion and analysis of financial
condition and results of operations contains forward-looking statements, which
involve risks and uncertainties. Barans actual results could differ materially
from those anticipated in these forward-looking statements as a result of
several factors, including those set forth under Risk Factors. Baran does
not assume any obligation to update the forward-looking statements or the risk
factors. Although Baran conducts its activities through separate divisions,
Barans management considers the divisions and the companies operating within
the divisions as an integrated, consolidated business deriving its revenues
primarily from consulting and engineering services. Consequently, management is
of the opinion that a discussion of segmented information is not necessary or
appropriate to an understanding of Barans business. Moreover, management
believes that separate reporting of information relating to the divisions on a
segment basis will not contribute significantly to an investors understanding
of Baran, because the divisions and the companies within them have
characteristics so similar (e.g., substantially all of the business consists of
consulting and engineering services) that they can be expected to have
essentially the same future prospects. Moreover, Baran does not restrict the
flow of funds or resources between divisions or the companies operating within
the divisions. To the extent any division or company within a division, in any
particular period, contributes in a materially disproportionate way compared to
any other described period to Barans revenues, profitability or cash, or where
management believes discussion of a certain division or company within the
division could assist to present a more complete picture of Barans business,
specific description of said division or company within the division is
included. You should read the following discussion in conjunction with Barans
consolidated financial statements and related notes included herein.

Selected Financial Data

The selected consolidated statements of operations and consolidated
balance sheet data set forth in this section with respect to the fiscal years
ended December 31, 2001, 2002, and 2003, have been derived from the
consolidated financial statements of Baran, which have been prepared in
accordance with Israeli GAAP with reconciliation for U.S. GAAP, and audited by
Kesselman & Kesselman, independent accountants in Israel and members of
PricewaterhouseCoopers International Limited. The Kesselman &
Kesselman report on the financial statements is based in part on the reports of
other independent accountants. All the other independent accountants reports
appear elsewhere in this Form 20-F. Israeli and U.S. GAAP vary in certain
respects, as detailed in note (20) to the financial statements included herein.
The selected consolidated financial data set forth below should be read in
conjunction with the audited consolidated financial statements and notes
thereto included elsewhere in this Annual Report. Baran has traditionally
prepared its financial statements in accordance with Israeli GAAP, and its
2003, 2002 and 2001 financial statements were originally prepared using Israeli
GAAP principles.

37

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Selected Consolidated Financial Data

| |                               |  | Year Ended December 31. | 
| | ----------------------------- |  | ----------------------- | 
| |                               |  |                         | 
| |                               |  | 1999                    | 
| |                               |  | In thousands of NIS     | 
| | Statement of IncomeData:      |  |                         | 
| | Israeli GAAP:                 |  |                         | 
| | Revenues                      |  | 607,634                 | 
| | Operating
  Income (Loss)     |  | 66,577                  | 
| | Net Income
  (Loss)           |  | 50,140                  | 
| | Earnings per
  share:         |  |                         | 
| | Basic and
  diluted           |  | 7.1                     | 
| | U.S. GAAP:                    |  |                         | 
| |                               |  |                         | 
| | Revenues                      |  | -                       | 
| |                               |  |                         | 
| | Operating
  Income (Loss)     |  | -                       | 
| |                               |  |                         | 
| | Net Income
  (Loss)           |  | -                       | 
| | Earnings per
  share:         |  |                         | 
| |                               |  |                         | 
| | Basic                         |  | -                       | 
| |                               |  |                         | 
| | Diluted                       |  | -                       | 
| |                               |  |                         | 
| |                               |  | Year Ended December 31. | 
| |                               |  |                         | 
| |                               |  | 1999                    | 
| |                               |  | In thousands of NIS     | 
| | Balance Sheet Data:           |  |                         | 
| | Israeli
  GAAP:               |  |                         | 
| | Total assets                  |  | 356,806                 | 
| |                               |  | 134,717                 | 
| |                               |  | 7,246                   | 
| | U.S. GAAP:                    |  |                         | 
| | Total assets                  |  |                         | 
| |                               |  |                         | 
| |                               |  |                         | 
| |                               |  |                         | 
| | Other
  financial data:       |  |                         | 
| | Israeli
  GAAP:               |  |                         | 
| | Dividend
  declared per share |  | 5.08                    | 
| | U.S. GAAP:                    |  |                         | 
| |                               |  |                         | 
| | Dividend
  declared per share |  | -                       | 

38

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| | (1) Excludes
  nonvested contingently returnable shares in the amount of 568,000, 474,000
  and 220,000 as of December 31, 2001, 2002 and 2003, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

Since the end of 2003, Baran operates through
four divisions. Each divisions relative contribution to the aggregate revenues
of Baran during the years 2001, 2002 and 2003, was as follows:

|Division                           |  | 2003     |   | 2002*    |   | 2001*      |  
|---------------------------------- |  | -------- | - | -------- | - | ---------- | -
|Communications
  Division          |  | 34       | % | 38       | % | 42         | %
|Civil
  Engineering Division       |  | 8        | % | 5        | % | 3          | %
|Industry
  Division                |  | 19       | % | 30       | % | 44         | %
|Technology
  and Services Division |  | 39       | % | 27       | % | 11         | %
|Total                              |  | 100      | % | 100      | % | 100        | %
|Revenues                           |  | NIS 695M |   | NIS 890M |   | NIS 1,011M |  

(*) The relative contribution ascribed to each division during
these years is estimated, based on the assumption that the divisional structure
of Baran during the years 2001 and 2002 are similar to the divisional structure
in the year of 2003.

The following table sets forth statements of
income in thousand NIS:

|For the Year ended December                            |  | 2001      |   | 2002    |   | 2003    |  
|------------------------------------------------------ |  | --------- | - | ------- | - | ------- | -
|                                                       |  |           |   |         |   |         |  
|Revenues                                               |  | 1,010,966 |   | 890,420 |   | 695,448 |  
|Cost of
  Sales                                        |  | 832,532   |   | 754,146 |   | 624,167 |  
|Gross Profit                                           |  | 178,434   |   | 136,274 |   | 71,281  |  
|%Gross
  Profit                                        |  | 18        | % | 15      | % | 10      | %
|Research and
  Development                             |  | 3,663     |   | 6,001   |   | 1,291   |  
|Selling and
  Marketing                                |  | 9,484     |   | 23,171  |   | 20,445  |  
|Administrative
  Expenses                              |  | 59,062    |   | 52,486  |   | 73,245  |  
|Operating
  Profit (Loss)                              |  | 106,225   |   | 54,616  |   | (23,700 | )
|%Operating
  Profit                                    |  | 11        | % | 6       | % | 0       | %
|Financing
  Income (Expenses)                          |  | 7,816     |   | (17,125 | ) | (10,046 | )
|Other Income                                           |  | 412       |   | 1,036   |   | 733     |  
|Goodwill
  impairment                                  |  |           |   |         |   | (36,304 | )
|Income
  before Taxes                                  |  | 114,453   |   | 38,527  |   | (69,317 | )
|Taxes on
  Income                                      |  | 44,496    |   | 16,953  |   | 9,826   |  
|Income
  (Loss) after Taxes                            |  | 69,957    |   | 21,574  |   | (79,143 | )
|Share in
  Profits (loss) of associated companies, net |  | (3,174    | ) | 1,040   |   | (617    | )
|Minority
  Interest in loss of subsidiaries, net       |  | 574       |   | 2,142   |   | 2,490   |  
|                                                       |  |           |   |         |   |         |  
|Net Income                                             |  | 67,357    |   | 24,756  |   | (77,270 | )
|                                                       |  |           |   |         |   |         |  

39

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Comparison of year ended December 31, 2001 to
year ended December 31, 2002

* The comparison is made pursuant to the divisional structure of Baran
during the years 2001 and 2002, which consisted of 6 divisions.

RevenuesBarans revenues for fiscal years 2002 and 2001 were
NIS 890.4 million ($203.3 million) and NIS 1,010.9 ($230.8million),
respectively. The 12% decrease in  
revenues in fiscal 2002 to revenues in fiscal 2001, is primarily the
result of the revenues generated from the Semiconductors division. At the end
of 2002, a large-scale Semiconductors project had come to its final stages,
which are characterized by a decrease in revenues as opposed to an increase in
expenses and allowances for the completion of the project. The decrease in
Barans revenues is also attributable to the Communications division, which has
completed a large-scale project with DBS Satellite Services (1998) Ltd. and due
to the termination of the agreement with Nokia GmbH in the middle of 2002.

Cost of Revenues and Gross MarginCost of revenues decreased 9% to NIS 754.1 million
($172.2 million) in fiscal 2002 from NIS 832.5 million ($190.1 millions) in
fiscal 2001. This decrease was consistent with the decrease in the level of
revenues generated by Baran and in the scope of projects, especially in the
Semiconductors and Communications divisions.

Gross margin in 2002 was 15% as compared to 18% in 2001. This decrease
can be attributed to the economic downturn, which led to a decrease in the
scope of projects and to a decrease in project prices, as well as a relative
increase in project related expenses due to completion of large-scale projects.
Additionally, the consolidation of Baran Telecom (formerly o2wireless Solutions
Inc.) operating results into Barans financial statements for the last quarter
of 2002, contributed to the decrease in gross margin.

Divisional Highlights.The largest portion of Barans revenues in 2002 was
produced by the Communications division, which accounted for 38% (NIS 341.5
million; $78 millions) of Barans overall revenues for fiscal 2002, and 42%
(NIS 427 million; $97.5 millions), of its revenues for fiscal 2001. Revenues in
the Communications division are generated from EPCM and turnkey services for
planning, designing and deployment of telecommunication network
infrastructures, installation of telecommunications equipment and other
telecommunications projects. Revenues of the Communication division decreased
from fiscal 2001 to 2002, due to significant declines in the telecommunications
market worldwide, as well as the completion of DBS Satellite Services (1998)
Ltd. project and the termination of the agreement with Nokia GmbH.

40

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| |  | During
  fiscal 2002, the Industrial division generated revenues of NIS 150.8 million
  ($34.4 million), 17% of Barans total revenues in fiscal 2002, compared to
  NIS 163.4 million ($37.3 million), 16% of Barans total revenues in fiscal
  2001. Revenues in the Industrial division have increased steadily over the
  past few years, primarily due to the addition of several new projects in the
  fields of biotechnology, chemicals and construction. In the beginning of
  2002, Baran transferred one of its subsidiaries (Baran Industries (91) Ltd.)
  from the Construction division to the Industrial division; however, 2000 and
  2001 divisional data in the financial statements were restated to reflect
  this change.                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | During
  fiscal 2002, the Semiconductors division was accounted for revenues of NIS
  114.1 million ($26 million), which constituted 13% of Barans total revenues
  in 2002, and NIS 282.7 million ($64.6 million), which constituted 28% of
  Barans total revenues of Bran in fiscal 2001. The Semiconductors divisions
  revenues peaked in 2001, primarily as a result of the completion of a
  long-term project for the management, planning and installation of a
  Semiconductors production facility in Israel that generated over NIS 560
  million ($128 million) in revenues over 33 months. The decrease during 2002
  also reflects the completion of the phase one of the Tower FAB 2 plant in Migdal
  Haemek. This division traditionally generates profit margins that are
  customary for turnkey projects, as the majority of the divisions projects
  are performed on a turnkey basis.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | During
  fiscal 2002, the Technologies and Investments division was accounted for
  revenues of NIS 179 millions ($40.9 millions), which constituted 20% of
  Barans total revenues in fiscal 2002 and NIS 98 million ($22.4 million),
  which constituted 10% of Barans total revenues in fiscal 2001. The increase
  in this division is primarily attributable to a full consolidation of
  Industrial Centers E.O.D Ltd. into Barans financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                

Research and development.Research and development expenses increased by 63.8%
to NIS 6 million ($1.4 million) in fiscal 2002 from NIS 3.7 million ($0.8
million) in fiscal 2001. This increase was due to investments in the
development of a cellular parking system network, as well as the acquisition of
Mobipower B.V. at the end of 2002, whose main activity is the implementation
and marketing of a cellular parking system network.

Selling and marketing.Selling and marketing expenses increased 144% to NIS
23.2 millions ($5.3 millions) in fiscal 2002 from NIS 9.5 million ($2.2
million) in fiscal 2001. This increase is primarily attributable to marketing
expenses incurred by the Technologies and Investment division, which is
responsible for the marketing of the Everswitch technology and the cellular
parking systems. Additionally, the expenses incurred in relation to the
commencement of activity in the US, including but not limited to the
registration on the Nasdaq, resulted in an increase in the marketing expenses
as well.

41

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General and administrative.General and administrative expenses decreased 11% to
NIS 52.5 million ($12 million) in 2002 from NIS 59 million ($13.5 million) in
2001. This decrease is primarily due to a policy, implemented in the beginning
of 2002, to reduce by 10%-15% the salaries paid to the senior management, as
well as a substantial decrease in the bonuses received by senior management at
the end of fiscal 2002.

Net financing incomeNet financing income decreased to a net loss of NIS 17
million ($3.9 million) in fiscal 2002 from net income of NIS 7.8 million ($1.8
million) in fiscal 2001. The net increase of financing expenses over financing
income in 2002 is primarily attributable to two reasons. The first is the
interest on a long term loan, in the aggregate amount of NIS 135 million, taken
by Baran continue its strategy of penetrating new markets and acquiring new
companies. As well as, the fluctuations in the Israeli economic indexes, such
as the devaluation of the US $ and Euro rates and the high inflation rate. The
high increase in those economic indexes resulted in depreciation of monetary
items and a substantial increase in financing expenses.

Comparison of year
ended December 31, 2002 to year ended December 31, 2003

RevenuesBarans revenues have been trending downwards since
2001. Barans revenues for fiscal years 2003 and 2002 were NIS 695.4 million ($
158.8 million) and NIS 890.4 ($203.3 million), respectively, representing a
decline of 22% in revenues in 2003 from 2002. The decrease in revenues is
mainly attributable to the local and worldwide recession and economic slowdown
and frequent political upheaval.  Governmental
entities are a substantial portion of the infrastructure market and the
decrease in their revenues has caused them to halt or scale back large-scale
projects that Baran was working on, such as the desalination project in Haifa
and the desalination project in Ashdod, the estimated scope of which was
$95-100 million each. On April 1st, 2004, Baran, received a letter
from the WDA in which the WDA notified CDL of the termination of the
desalination project in Haifa. In the letter, the WDA claimed that the
termination is due to CDLs breach of obligations contained in the Agreement,
including CDLs failure to execute financing agreements. CDL and the WDA have
entered into an arbitration process regarding the termination, and CDL legal
counsel believes it has good legal arguments against the WDA.

In addition, a recent step to privatize large governmental entities has
provoked substantial union and labor dispute, which will substantially delay
the completion of these actions. Until this process is completed, existing and
future infrastructure projects are likely to be suspended or postponed.

42

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The decrease in revenues also results from the completion of several
large scale projects, mainly in the Industry and Communication divisions, on
which Baran was engaged. For example, stage B of the semiconductor FAB2 project
has been completed, yet stage C of this project has not yet commenced.
Furthermore, significant large scale projects in the Communications and
Industry divisions (which include Barans semiconductor activity) were
postponed and their commencement is expected during 2004 subject to an
improvement in those markets. In fact, Baran did not commence any material
large scale projects in the Industry and Communications divisions during 2003.  The general decrease in revenues during 2003
was partially offset by the results of Baran Telecom (formerly o2 wireless
Solutions Inc.) which was acquired in November 2002.  The inclusion of this entity in the operations of Baran Group
resulted in an increase in the revenues of the Communications division by
approximately NIS 88 million ($20 million).

The Technology and Services division revenues generated mainly from
selling of products increased from 27% of Barans revenue to 39% during 2003 as
a result of Barans continued penetration to this market.

Cost of Revenues and Gross MarginCost of revenues decreased 17% to NIS 624.2 million
($142.5 million) in fiscal 2003 from NIS 754.1 million ($172.2 millions) in
fiscal 2002. This decrease was consistent with the decrease in the level of
revenues generated by Baran and in the scope of projects in progress,
especially in the Industry and Communications divisions. Since Barans cost of
labor is relatively rigid and comprises a substantial portion of its cost of
revenues, Barans labor costs cannot decrease at the same rate as the decrease
in Barans scope of projects in progress.

Gross margin in 2003 was 10% as compared to 15% in 2002. The endeavors
to attract new project and participate in tenders resulted in expenses to the
Company, which have not yet yielded fruits, causing the gross margin to further
deteriorate. Due to the WDA decision to terminate the Desalination project in
Haifa, all the project related expenses were included in the Barans financial
results for the year 2003, which resulted in a substantial decrease of the
gross margin.  In addition, due to
severe and extensive engineering difficulties experienced during the last third
of 2003 in the Nachshonim project, Baran recorded an accrual for additional
costs of the project.  As a result of
this accrual, Baran recorded a gross loss of NIS 6.13 million ($1.4 million) in
the project.

The relatively high portion of revenues from products sales, such as
the sale of Industrial Centers E.O.D Ltd.s
various raw materials (especially grains), in 2003 also decreased the
overall gross profit rate. As the gross profit generated from product sales is
generally lower than that from project revenues.  Since the portion of Barans revenues from product sales higher
in 2003 than 2002, there was a downward effect on the gross profit rate.

43

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Divisional Highlights

To increase its operating efficiency during 2003 Baran consolidated its
divisions into four divisions, namely Communications division, Civil
Engineering division, Industry division and Technology and Services division.

| |  | Industrial division: In August 2002, Carmel
  Desalination Ltd. (CDL) won a bid for the planning, construction, operation
  and maintenance (B.O.O) of a desalination plant in Haifa, Israel. According to
  the original agreement the expected scope of the project was approximately
  NIS 450 million ($100 million). However, on April 1st, 2004, CDL
  received a letter from the WDA in which the WDA notified CDL of the
  termination of the Desalination Facility BOO Agreement. In the letter, the
  WDA claims that the termination is due to CDLs breach of obligations
  contained in the Agreement, including CDLs failure to execute financing
  agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | The WDA
  further announced that it intends to collect the Performance Bond issued to
  it by CDL. The Bond on the sum of NIS 35 million ($7.78 million) (Barans
  share of the Performance Bond is NIS 11.67 million ($2.59 million)) was
  forfeited on May 2nd, 2004. CDL rejects all the allegations made against it
  and intends to use all applicable legal measures against WDA. CDL and the WDA
  have already entered n arbitration process in the matter. Barans legal
  counsel is of the opinion that CDL has good legal arguments against WDA. The
  estimated costs of the project to date, which were recorded in the financial
  statements of Baran, are NIS 5 million ($1.14 million).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |   | Furthermore,
  structural changes in Mekorot (the Israeli National Water Company), which
  took place during the end of 2003 continuing through 2004, resulted in the
  suspension for the time being, of the water desalination facility in Ashdod,
  Israel, a Turn key project of approximately $95 million to be performed by
  a consortium composed of Baran and Ionics Inc. in equal parts. The estimated
  construction period is two years. The desalination facility is planed to
  desalinate 30 million m3/year, using reverse osmosis technique.
  The estimated costs of the project to date, which were recorded in the
  financial statements, are approximately NIS 4 million. The consortium gave Mekorot
  a $5 million Bid bond which is expected to be replaced by a $9 million
  performance bond upon the projects commencement. The current expectation is
  that this problem will be resolved within 3 to 6 months.                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | Civil Engineering division: During the last
  third of 2003, severe and extensive engineering difficulties were discovered
  in Nachshonim, a turnkey project for the construction of a modern military
  base designed to serve as a dry storage facility for the Israeli Defense
  Forces. Accordingly, in the last quarter of 2003, the joint venture recorded
  an accrual for additional costs in the project which resulted in a loss of
  $1.4 million to Baran. Further developments during the first quarter of 2004
  lead the partners to reassess the expected results of the project.  The projects budget now indicates a loss
  of $15 million; accordingly Baran shall record a gross loss of one third
  (1/3) of the loss in the 2004 financial statements. The joint venture
  believes it has insurance coverage for this kind of events, as well as
  ability to obtain Change Order requests approval, however currently the joint
  venture can not determine to what extent (whether full or partial), the
  additional costs will be recovered by the insurance company, or whether or
  not the requested Change Order shall be approved. Therefore no income of such
  funds was recorded at this stage.

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| |  | Communications division- In connection with the annual review of assets required by FAS 142
  issued by the Financial Accounting Standard Board, as well as the IFAS 15
  issued by the Israeli Financial Accounting Standard, Baran determined to write down approximately $7.75 million of
  goodwill and amortization on its balance sheet, as a result of a
  determination that the goodwill of Baran Telecom Inc. (Barans US subsidiary)
  had been impaired. Baran Telecom (formerly o2wireless Solutions Inc.) was
  acquired and merged with Barans subsidiary in November, 2002 in
  consideration for Baran common stock valued at approximately $4 million.
  Revenues and income at Baran Telecom Inc lagged behind the income target and
  its planned work budget.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Technology and Services Division: Due to the
  fact that in 2003 Mobipower reduced its activities and is now considering
  continuing its operations, and due to Mobipower losses, the Company recorded
  on December 2003, an erasure in respect of goodwill accordingly to, in amount
  of adjusted NIS 2,626 thousands ($600 thousands). (See Note 2 of the
  financial statements).                                                                                                                                                                                                                                                                                                                                                                                            

Research and development.Research and development expenses decreased by 78%
from NIS 6 million ($1.4 million) in fiscal year 2002 to NIS 1.3 millions ($0.3
million) in fiscal year 2003. The decrease is mainly attributed to Barans
decision to minimize the development pace of the T.P.S Teleparking System for the
time being. Due to the fact that the company which develops the T.P.S
Telparking System, failed to meet its planned budget and time schedule, Baran
now anticipates that the development of the Teleparking System will be
materially more expensive and time consuming than was previously forecasted by
the developing company.

Selling and marketing.Selling and marketing expenses decreased by 12% to NIS
20.4 million ($4.7 million) in fiscal 2003 from NIS 23.2 million ($5.3 million)
in fiscal 2002. This decrease is due to the fact that during 2002 Baran
incurred exceptional and irregular selling and marketing expenses, such as the
expenses related to the establishing of Baran activity in the US.

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General and administrative.General and administrative expenses increased by 39.5%
to 73.2 NIS million ($16.7 million) in 2003 from NIS 52.5 million ($12 million)
in 2002. In spite of Barans efforts to become more efficient by freezing
salary increases, decreasing bonuses and benefits to employees and management,
an increase occurred in general and administrative expenses. The main reasons
for such increase are costs related to the completion of the merger with
o2wireless Solutions and the integration of its business, and the registration
of Barans shares in the Nasdaq.  In
addition, Baran incurred expenses related to the conformity with Securities and
Exchange Commission requirements; as well as, operational amortization expenses
of goodwill for 2003 of some of Barans subsidiaries in the sum of NIS 13.2
million ($3 million). Baran also incurred irregular expenses, such as insurance
costs, legal expenses and other fees and expenses related the acquisition of
o2wireless Solutions including the settlement of past debts.

Net financing loss.Net financing income decreased to a net loss of NIS 10
million ($2.3 million) in fiscal year 2003 from net loss of NIS 17 million
($3.9 million) in fiscal year 2002. About 25% of the financing expenses are
attributed to loans taken in order to finance Barans real estate projects, including
but not limited to Ezorie Dagan project. Furthermore a 7.6% devaluation of US $
against NIS and a 11.3 % devaluation of NIS against the Euro on one hand, and a
negative inflation rate in Israel during 2003 on the other hand have led to a
decrease in Barans financial expenses.

Goodwill impairmentEvaluations have been performed in relation to several
of Barans and its subsidiaries assets and operations which amounted to NIS
36.3 million ($8.3 million) expenses for 2003. Following the merger and acquisition
of o2Wireless Inc. Baran conducted an evaluation of former o2Wireless Inc.
assets (hence Baran Telecom), which resulted in a unique goodwill write down of
NIS 34 million ($ 7.75 million), (most of the impairment) in addition to an
operational amortization write down (in accordance with Israeli GAAP) in the
sum of NIS 10 million ($ 2.3 million). 
If the company accomplishes its income targets and planned budget, no
further amendment to Barans goodwill is expected.

Taxes on IncomeDuring 2003, Barans income tax expense was NIS 9.8
million ($2.2 million) in spite of its pre tax loss of NIS 69.3 million ($15.8
million). The tax on income expense results from taxes attributable to the
operations of some of Barans profitable subsidiaries, as well as to the fact,
that several significant expenses Baran incurred during 2003 are not tax
deductible, in particular the NIS 36.3million ($ 8.3 million) goodwill
impairment and NIS 13.2 million ($ 3 million) of good will amortization
expenses.

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Liquidity and Capital Resources

Barans primary source of funds in 2000 and 2001 was cash generated
from operations and retained earnings. However, in the years 2002 and 2003
during which Baran suffered negative cash flow, Baran used past cash surplus as
well as bank credit as its main financing source. Baran generated negative cash
flow from current operations in the fiscal year 2003 in the amount of NIS 63.3
million ($14.5 million), primarily as a result of extensive cash consumption by
Baran Telecom activity and funding the operations in the Nachshonim project.
Furthermore, endeavors to attract new project and participation in tenders of
large-scale desalination B.O.O projects and preparations to execute them,
resulted in expenses to Baran, however, the projects execution is suspended for
the time being by the Israeli Government. Additionally, entry into new markets
(mainly Romania and the Czech Republic) required the investment of substantial
funds, which resulted in expenses to the company. On the other hand, Baran received
the sum of NIS 14 million from D.B.S. Satellite Services (1998) Ltd. under a
settlement agreement, which was approved by the Tel-Aviv District court on
February 21, 2002, according to which, D.B.S. Satellite Services (1998) Ltd.
agreed to pay Baran NIS 55.5 million over a period commencing on February 21,
2002 and lasting until December 31, 2004. 
By the end of 2003, D.B.S. Satellite Services (1998) Ltd. has paid Baran
NIS 41.95 million due pursuant to the settlement and an adjusted amount of NIS
13.55 million, for which Baran has obtained credit insurance, remains
outstanding as of December 31, 2003.

Trade payables as of December 31, 2003 were NIS 67.7 million ($15.5
million), as compared with NIS 97.1 million ($22.2 million) as of December 31,
2002. The decrease in trade payables is due mainly to the general substantial
decrease in Barans scope of operations. Short term credit from banks and
others was NIS 134.7 million ($30.8 million) as of December 31, 2003 as
compared with NIS 99.1 million ($22.6 million) as of December 31, 2002.
Long-term credit from banks, net of current maturities was NIS 139.9 million
($31.9 million) as of December 31, 2003 as compared to NIS 163.7 ($37.4
million) as of December 31, 2002. The increase in the short term credit during
2003 was due primarily to loans from banks taken to finance Barans operations
and, particularly, its U.S.A operations, while the decrease in the long-term
credit during 2003, resulted from the fact that Baran paid off a substantial
amount of its loans. Taking advantage of the low interest rates, on February
10, 2002, Baran entered into a loan agreement with Bank Leumi LeIsrael B.M.,
whereby the bank granted Baran a NIS 45 million loan for a period of three
years, linked to the consumer price index and bearing an interest rate of 3.8%.
On February 11, 2002 Baran entered into an additional loan agreement with Bank
Hapoalim B.M., whereby the bank granted Baran a NIS 90 million loan for a
period of five years, linked to the Israeli consumer price index and bearing an
interest rate of 3.9%. The rates of the abovementioned loans were significantly
lower than the loan rates generally offered in the Israeli market during 2003,
and as a result, Baran managed to decrease its capital cost and its financing expenses.

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Corporate Tax

During the years 2001 and 2002 Baran was subject to an effective tax
rate of 39% and 43% on its profits, respectively, while in the year 2003 Baran
had income tax expense of NIS 9.8 million ($2.2 million) in spite of the NIS (69.3)
million ($(18.8) million) losses Baran suffered in 2003. The main reason for
the income tax expense is the fact that several significant expenses Baran
incurred during 2003 were not tax deductible, in particular the NIS 34 million
($ 7.75 million) goodwill impairment and NIS 10 million ($ 2.3 million) of good
will amortization expenses. For additional information please see note 13 of
the financial statements.Israeli companies are generally subject to income tax at a corporate
rate of 36% and dividends are taxed at 25%. The higher tax rate in the recent
years is due to the inability to offset losses of certain companies (including
those acquired and combined in the balance sheet) against profits from other
companies.

Two of Barans subsidiaries, Baran Energies International Ltd. and
Baran Advanced Technologies (1986) Ltd., were granted an approved enterprise
status for some of their activities and are eligible for tax benefits under the
Law for the Encouragement of Capital Investments, 1959. Subject to compliance
with applicable requirements, the portion of Baran Energies income derived
from its approved enterprise activity is subject to a reduced corporate tax
rate of 25% and dividends paid out of such income are subject to a reduced tax
of 15%; Baran Technologies income derived from its approved enterprise
activity will be exempt from Israeli corporate tax (unless dividends are paid,
in which case the corporate tax rate will be 25% and the rate of tax on
dividends will be 15%). The beneficial tax treatment will remain in effect for
a limited period.The approved enterprise status imposes certain requirements on these
subsidiaries, such as the location of their manufacturing facility, location of
certain subcontractors and the extent to which they may outsource portions of
their production process. These requirements limit their freedom to pursue
other, more favorable production arrangements. If these subsidiaries do not
continue to meet these requirements, the law permits the authorities to cancel
the tax benefits retroactively.

Government Grants

Mobipower Ltd. (formerly known as T.P.S. Teleparking Systems Ltd.) and
Baran Advanced Technologies (1986) Ltd. have been financed, in part, through
grants from the Office of the Chief Scientist of the Israeli Ministry of
Industry and Commerce. Royalties on the revenues derived from sales of products
for which these grants were received are payable to the Israeli government, at
a rate ranging from 2% to 3%. The technology developed with the governmental
funding is subject to several legal restrictions, including the obligation to
manufacture the product based on this technology in Israel and to obtain the
Office of the Chief Scientists consent to transfer the technology to a third
party. These restrictions, which continue to apply even after both Mobipower
and Baran Technologies have paid the full amount of royalties payable for the
grants, may impair Mobipower and Baran Technologies ability to outsource
manufacturing or enter into similar arrangements for some of their products or
technologies.  The aggregate amount
received by Mobipower and Baran Technologies was NIS 4,445 thousands ($1,015
thousands), of which NIS 1,169 thousands ($267 thousands) was repaid and NIS
3,274 thousands ($748 thousands) remains outstanding.

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Patents and Licenses

Part of Barans product development strategy is to seek, when
appropriate, protection for its products and proprietary technology through the
use of various Israeli, United States and foreign patents and contractual arrangements.

Baran Advanced Technologies (1986) Ltd., a wholly-owned subsidiary of
Baran, holds several patents or has applied for patent protection in the
following jurisdictions: a patent in Europe and in the United States on its
Everswitch technology; a patent application in the United States and an
international patent application for an optical mouse for deployment on a
keyboard, produced on the basis of the Everswitch technology; and patents in
Israel, Europe and the United States,and
several pending patents in the United States, Europe  and internationally, for the Mobipower cellular parking system.
However, as a result of Baran and its partners decision to minimize the
development pace of the cellular parking system and all expenses related
thereto, due to reasons described it detail in the 2003 Research and
Development section of this item, Baran also decided to minimize its patent
protection costs, mainly in countries where the chances for intellectual
property rights violation are relatively low.Advanced Logistics Development Ltd., an affiliated company of Baran,
holds 52% of the shares in a company named Favoweb Ltd. Favoweb Ltd., is the
sole owner of patents in Israel, Europe and the United States for a system for
the collection and reporting of errors and failures in the Internet and
Intranet through voice and video technologies, known as Favoweb. Advanced
Logistics protects its other technological products through a special plug (a
hardware based software protection system) that prevents unauthorized users
from using its software, and through an internally developed device integrated
within its software.

In addition, Baran protects its technological products and know-how
through confidentiality agreements typically executed with employees, subcontractors
and suppliers. Certain proprietary information and intellectual property rights
enjoy the protection of Israeli statutory law and Israeli case law. Most of
Barans activities and sales are performed in Israel, European countries and in
the United States, where broad protection for intellectual property rights is
available. Baran has also obtained patents in other countries worldwide,
including those where intellectual property protection is not as broad as in
the United States and Europe, such as countries in Asia. Barans patents have
expiration dates ranging between the years 2010 and 2015.

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Trend information

Throughout the 1990s, the telecommunications and semiconductors
industries enjoyed tremendous growth as telecommunications carriers made large
capital investments in order to expand the presence and capacity of their
networks, and upgrade their existing networks. In addition, semiconductors
manufacturers made large capital investments to expand their production
capacity to meet the demands of the growing market. However, with the economic
downturn that began in 2001 and lasted until 2003, the recession, weakened
economy and tightened capital markets caused telecommunication carriers and
Semiconductors manufacturers to substantially limit their capital investments,
reducing demand for deployment of new telecommunications networks and
implementation of new projects in the Semiconductors industry. According to
Barans current estimates, these industries are expected to begin a recovery
during 2004, with some very preliminary minor recovery indicators spotted in
2003. First signs of this recovery might be seen in the declarations of large
companies and organizations, of their intent to initiate projects, including,
among others, the plans of the American Government in respect of its Homeland
Security Project. An additional sign for recovery may be new (limited scale)
project orders Baran received lately.

Baran continues to believes that traditional process-oriented
industries, such as chemicals, petrochemicals, energy, and food processing,
which are the target markets of Barans Industry division, face a prolonged
slowdown and recession both in Israel and worldwide. The current economic
climate has resulted in a decrease in the number of new projects for this
division, and the number of new large-scale engagements for this divisions has
consequently declined.

To address the challenges presented by the economic slowdown, Barans
Industry division has expanded its areas of expertise to fields that have been
less impacted by recent economic difficulties, such as the biotechnology,
natural gas, water and pharmaceutical industries. Baran believes that
traditional process- oriented industries will recover with the general recovery
of the economy.

The Israeli market in which the Civil Engineering division operates has
been relatively stable over the last few years and, absent of negative impacts
of a war in the Middle East on these industries in Israel, Baran expects the
market to grow in the coming years due to a number of large infrastructure,
railway and construction projects planned by the Israeli government. Since the
beginning of 2003, most of the industries in which each of Barans divisions
operates have experienced a deep recession. These factors materially adversely
affect businesses of each of Barans divisions although Barans divisions are
not equally affected.

Impact of inflation and currency fluctuations

The dollar cost of Baran operations in Israel is influenced by the
timing of any change in the rate of inflation in Israel and the extent to which
such change is not offset by the change in valuation of the NIS in relation to
the dollar. The same is true in relation to Barans Euro cost of operations in
Israel. During 2003, the dollar was devalued against the NIS by 7.6%, the NIS
was devalued against the Euro by 11.3%, and the consumer price index in Israel
decreased by 1.9%. During 2002, the NIS was devalued against the dollar by
7.3%, the NIS was devalued against the Euro by 27.2%, while the consumer price
index in Israel increased by 6.5%.

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In order to reduce its exposure to currency fluctuations, Baran is
using two safeguards. First, Baran endeavors to create a correlation between
the bases of income and expenses, to prevent exposure to fluctuations in the exchange rates. With
respect to large projects and special projects where the consideration is
linked to the U.S. dollar, or to the Euro or to the currency of another
country, receipts and advances are usually linked to the currency in which most
of the related expenditures will be incurred. For existing projects in Israel,
changes in exchange rates are not of material significance for Baran, since the
related income and expenses are in Israeli currency, so that there is no
exposure to currency fluctuations. Second, the activities of Barans
subsidiaries are carried out in the local currencies of their countries of
residence, therefore Baran operates in numerous currencies which limits to some
degree its exposure to fluctuations in exchange rates as it is not particularly
exposed to one currency which are, usually, their functional currencies.
Accordingly, Baran does not use any special hedging transactions to protect its
operations.

Baran believes that the rate of inflation in Israel has had a minor
effect on its business to date. As Barans long-term bank loans are linked to
the Israeli CPI, the decrease in the CPI has led to a decrease in Barans
liabilities. However, Barans dollar costs in Israel will increase if inflation
in Israel exceeds the devaluation of the NIS against the dollar or if the
timing of such devaluation lags behind inflation in Israel.

|The
  inflation rate in Israel in the recent five years: | 
|-------------------------------------------------------- | 
|During 1999                                              | 
|During 2000                                              | 
|During 2001                                              | 
|During 2002                                              | 
|During 2003                                              | 

Off-balance sheet arrangement

Baran as a leading engineering and infrastructure company is usually
required by its customers to issue performance guarantees. If, for any reason,
Baran has not succeeded in performing its obligations, or under other
circumstances under a certain contract, the customer is entitled to forfeit the
performance guarantee. The probability of such occurrence is usually considered
remote, nonetheless, on April 1st, 2004, CDL, received a letter from
the WDA in which the WDA notifies CDL of the termination of the Desalination
Facility BOO Agreement. The WDA further announced that, it intends to collect
the Performance Bond issued to it by CDL. The Bond on the sum of NIS 35 million
($7.78 million), (Barans share of NIS 11.67 million ($2.59 million)) was
forfeited on May 2nd, 2004. CDL rejects all the allegations made
against it and intends to use all applicable legal measures against WDA. CDL
and WDA have already entered and arbitration process and Barans legal counsel
is of the opinion that CDL has good legal arguments against the WDA.

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Furthermore, according to the conditions of the Nachshonim project
performed by Baran and two partners, a performance guarantee has been issued in
favor of the State of Israel in the sum of NIS10 million (approximately $2.3
million). Due to recent difficulties in carrying out the project, if Baran and
its partners do not meet certain terms and conditions, the State of Israel may
consider forfeiting all or part of the performance guarantee.

Baran and its two partners in  the
Nachshonim project believe that an additional year beyond the time schedule
agreed upon with the client is required for completion of the project. Baran
and its two partners submitted a Change Order request for an extension they
believe is required for completing the project. If they fail to obtain the
clients consent, Baran and its two partners will be required to pay the sum
$21,000 per each day of delay. The project management estimates that the likelihood
of obtaining the additional extension is probable

Baran current estimation is that additional Off-balance Sheet
arrangements are not material and that at the moment, it seems that such
arrangements are not expected to lead to any substantial risk or exposure to
Baran in the foreseeable future.

Tabular disclosure contractual obligations
(in thousands of dollars)

The following table summarizes our contractual obligations and
commitments as for December 31, 2003:

|Contractual
  Obligations                   |  | Total   |  | Less
  Than 1 year |  | 1-3 Years |  | 3-5 Years |  | More
  than 5
  Years | 
|------------------------------------------- |  | ------- |  | ------------------ |  | --------- |  | --------- |  | --------------------- | 
|                                            |  |         |  |                    |  |           |  |           |  |                       | 
|                                            |  |         |  |                    |  |           |  |           |  |                       | 
|Short-term
  bank
  credit and bank
  loans |  | 25,126  |  | 25,126             |  |           |  |           |  |                       | 
|Accounts
  payable
  and accruals (1)       |  | 41,229  |  | 41,229             |  |           |  |           |  |                       | 
|Long-term
  bank
  loans (2)                |  | 37,577  |  | 5,638              |  | 21,289    |  | 10,650    |  |                       | 
|Lease
  agreements
  (3)                    |  | 6,690   |  | 2,138              |  | 1,892     |  | 2,660     |  |                       | 
|Total contractual
  obligations             |  | 129,629 |  | 89,307             |  | 27,012    |  | 13,310    |  |                       | 

(1) Accounts payable and accruals include our trade accounts payable
for services that have already been supplied.

(2)  Long-term bank loans
include principal and interest payments in accordance with the terms of the
credit facilities granted to Baran by Bank Leumi and Bank Hapoalim.

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(3) Lease agreements include both operating lease and lease obligations
of cars, equipment, office space and warehouse space mainly in Israel and the
United States.

Critical Accounting Policies and Significant
Accounting Estimates

In completing Barans Financial Statements, management is required to
make a number of assumptions and estimates that directly and materially impact
the consolidated financial statements and related disclosures. Those
assumptions and estimates form the basis for certain of Barans accounting
policies described in note 1 to Barans consolidated financial statements. The
accounting policies that are most important to the portrayal of Barans
financial condition and results of operations, and require managements most
difficult, subjective or complex judgments, are considered to be critical
accounting policies. Because of the uncertainties inherent in making
assumptions and estimates regarding unknown future outcomes, future events may
result in significant differences between Barans estimates and actual results.
Management believes that each of Barans assumptions and estimates are
appropriate in light of the facts currently available, and represent the most
likely future outcome. Baran believes its critical accounting policies relate
to its estimates of costs to complete projects and revenue recognition on its
contracts, the collectibility of its contracts and trade receivables, and
warranty provisions.

Below you may
find the accounting policies that are most important to the portrayal of
Barans financial condition and results of operations. For further information and for information regarding
significant estimates used in preparing Barans consolidated financial
statements see Note 1 of the consolidated financial statements.

Revenue recognition from contracting work in
progress.
Baran recognizes revenue from contracting work by the percentage-of-completion
method, provided the following conditions are met: collection of revenues is
expected, revenues and costs can be estimated reasonably, and there is
likelihood that the project will be completed and that contractual obligations
to customers will be met. When estimating the final outcome is impractical,
Baran uses a zero estimate of profit (i.e. equal amounts of revenue and cost
are recognized until results can be estimated more precisely) (zero profit
method).

In addition to the above mentioned revenues recognition methods,
profits from contract work on buildings is recognized by the percentage of
completion method if the stage of completion has reached at least 25%; prior to
this stage profits are recognized by the zero profit method. Baran measures
progress toward completion based on the output measure of value added for its
turnkey project. Baran determines the relative value added of each component to
the total project value added based on the ratio of costs of the component to
total expected costs, at the commencement of the project. Such ratio of
relative value of each component remains unchanged during the project. Relevant
component output measures are used to determine progress toward completion of
each component. The project percentage of completion method (weighting the
appropriate components) is applied to the total estimated project revenues and
project costs to determine the amount of revenue and costs recognized, on a
cumulative basis. Changes in estimates for revenues, costs, and profits are
recognized in the period in which they are determinable using the cumulative
catch-up method of accounting. In respect of work for which a loss is
anticipated, a provision for the entire loss is made immediately.

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Allowance for doubtful accounts.The allowance is determined for specific debts of
which collection is doubtful.

Research and development expenses.Research and development expenses are charged to
income as incurred. Grants from government departments for approved projects
are recognized as a reduction of expenses as the related cost is incurred (see
also note 15g to Barans financial statements).

Warranty provisions.A warranty provision is provided in Barans financial
statements for:

| |  | those
  projects where a warranty period is defined in the relevant agreement, or                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | based on
  past experience with a specific project where expenses were incurred for a
  customer during the warranty period.

The warranty period is typically between one and two years and is determined
by each particular agreement. The amount of the warranty is calculated based on
engineering estimates which are based on projected expenses and costs, and on
past experience. Every quarter, the provision is re-examined and updated based
on both the remaining warranty period, and on the expected cost of fulfilling
the warranty obligation.

Recently issued accounting pronouncements in
Israel

In October 2001, the IASB issued Israel Accounting Standard No. 12  Discontinuance of Adjusting Financial
Statements for Inflation, which provided for the discontinuance of adjusting
financial statements for the effects of inflation, as of January 1,
2003.  In December 2002, Accounting
Standard No. 17 was issued that postponed the date from which Accounting
Standard No. 12 is to be applied until January 1, 2004. The
inflation-adjusted amounts as of December 31, 2003, as presented in these
financial statements will be the basis for the nominal-historical financial
reporting in the following periods.

The implementation of Standard No. 12 will mainly affect the financial
income (expenses).

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Upon implementation of Standard No. 12, Clarifications No. 8 and 9 to
Opinion 36 of the Israeli Institute will be canceled and will be replaced
with effect from January 1, 2004 by Israel Accounting Standard No. 13  Effect of Change in Foreign Currency
Exchange Rates, which was issued at the same time as Standard
No. 12.  Most of the provisions of
Standard No. 13 correspond to the provisions, which appeared in the above
mentioned clarifications. Nevertheless, the following matters will affect the
translation of the financial statements of overseas operations:

Goodwill resulting from the acquisition of such operations will be
treated  commencing from the date that this standard comes into effect  as an
asset of the investee company and will be translated into NIS as stipulated by
the standard (formerly, goodwill was treated as an asset of the holding
company).

Operating results from overseas operations will be translated into NIS
at the exchange rates existing on the dates of the transactions (or at the
average exchange rates for the period, where these approximate the actual
exchange rates), and not at the year-end exchange rate.

In February 2003, Accounting Standard No. 15 of the IASB
Impairment of Assets became effective. 
This standard requires a periodic review of the need for a change in the
provision for the impairment of the Companys non-monetary assets,  fixed assets and identifiable intangibles,
including goodwill, as well as investments in associated companies.

Commencing in 2003, the Company assesses 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 one or more of the
above assets. When such indicators of impairment are present, the Company
evaluates whether the carrying value of the assets 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.

When it is not possible to assess whether an impairment provision is
required for a particular asset on its own, the need for such a provision is
assessed in relation to the recoverable value of the cash-generating unit to
which that asset belongs. A cash-generating unit includes goodwill allocated to
that unit, and any impairment loss relating to that unit is initially allocated
to the goodwill and then to the other assets. 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 then 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.

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With effect from 2003, the Company reviews 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. In
2001, the Company recorded a provision for the impairment of its investment in
an associated company. The investment in this associated company is presented
at the lower of the investment amount, under the equity method (before making
the impairment provision), and its recoverable amount, in accordance with
clarification No. 1 of Accounting Standard No. 15, as long as the recoverable
value, on which the impairment provision was based, remains unchanged, the
company will record its share in the associated companys losses (up to the
amount of the impairment provision) by reducing the aforesaid provision,
without having effect on the companys results. In addition it was determined
that the loss caused by the impairment will be reclassified as share in profits
of associates companies

Recently Issued Accounting Pronouncements in
the United States

FAS 132In December 2003, the FASB issued SFAS No. 132 (revised
2003), Employers Disclosures about Pensions and Other Postretirement
Benefits, an amendment of FASB Statements No. 87, 88 and 106, and a revision of
FASB Statement No. 132 (FAS 132 (revised 2003)). This statement revises
employers, disclosures about pension plans and other postretirement benefit
plans. It does not change the measurement or recognition of those plans. The
new rules require additional disclosures about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans.Part of the new disclosures provisions are effective for the 2003
calendar year-end financial statements, and accordingly have been applied by
the Company in these consolidated financial statements. The rest of the
provisions of this Statement, which have a later effective date, are currently
being evaluated by the Company.

FIN 46In January 2003, the FASB issued FASB Interpretation
No. 46, Consolidation of Variable Interest Entities (FIN 46). Under FIN 46,
entities are separated into two populations: (1) those for which voting
interests are used to determine consolidation (this is the most common
situation) and (2) those for which variable interests are used to determine consolidation. FIN
46 explains how to identify Variable Interest Entities (VIEs) and how to
determine when a business enterprise should include the assets,
liabilities, non - controlling interests, and results of activities of a VIE in
its consolidated financial statements.

56

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Since issuing FIN 46, the FASB has proposed various amendments to the
Interpretation and has deferred its effective dates. Most recently, in December
2003, the FASB issued a revised version of FIN 46 (FIN 46-R), which also
provides for a partial deferral of FIN 46. This partial deferral established
the effective dates for public entities to apply FIN 46 and FIN 46-R based on
the nature of the variable interest entity and the date upon which the public
company became involved with the variable interest entity. In general, the
deferral provides that (i) for variable interest entities created before February
1, 2003, a public entity must apply FIN 46-R at the end of the first interim or
annual period ending after March 15, 2004, and may be required to apply FIN 46
at the end of the first interim or annual period ending after December 15,
2003, if the variable interest entity is a special purpose entity, and (ii) for
variable interest entities created after January 31, 2003, a public company
must apply FIN 46 at the end of the first interim or annual period ending after
December 15, 2003, as previously required, and then apply FIN 46-R at the end
of the first interim or annual reporting period ending after March 15, 2004.

The Company has currently no variable interests in any VIE.
Accordingly, the Company believes that the adoption of FIN 46 and FIN 46-R will
not have a material impact on its financial position, the results of its
operations and and/or its cash flows.

SAFE HARBOR

This statement contains forward-looking statements as defined by
federal securities laws which are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
expectations, intentions, projections, developments, future events, performance
or products, underlying assumptions, and other statements which are other than
statements of historical facts. In some cases, you can identify forward-looking
statements by terminology such as may, will, should, expects,
intends, plans, anticipates, contemplates, believes,
estimates, predicts, projects, potential, continue, and
other similar terminology or the negative of these terms. From time to time, we
may publish or otherwise make available forward-looking statements of this
nature. All such forward-looking statements, whether written or oral, and
whether made by us or on our behalf, are expressly qualified by the cautionary
statements described on this statement, including those set forth below, and
any other cautionary statements which may accompany the forward-looking
statements. In addition, we undertake no obligation to update or revise any
forward-looking statement to reflect events, circumstances, or new information
after the date of the information or to reflect the occurrence of unanticipated
events, and we disclaim any such obligation.

Forward-looking statements are only predictions that relate to future
events or our future performance and are subject to known and unknown risks,
uncertainties, assumptions, and other factors that may cause actual results,
outcomes, levels of activity, performance, developments, or achievements to be
materially different from any future results, outcomes, levels of activity,
performance, developments, or achievements expressed, anticipated, or implied
by these forward-looking statements. As a result, we cannot guarantee future
results, outcomes, levels of activity, performance, developments, or
achievements, and there can be no assurance that our expectations, intentions,
anticipations, beliefs, or projections will result or be achieved or
accomplished.

57

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ITEM 6. DIRECTORS AND SENIOR MANAGEMENT

Barans directors and executive officers and their ages and positions
are as follows:

Name Age Principal Position

|Meir Dor         | 57 | Chairman of
  the Board of Directors and CEO    
|---------------- | -- | ------------------------------------------------
|Menachem Gal     | 56 | Senior
  Executive Officer and Director         
|Abiel Raviv      | 59 | Senior
  Executive Officer and Director         
|Israel
  Gotman  | 57 | Executive
  Officer and Director                
|Isaac
  Friedman | 54 | Executive
  Officer and Director                
|Israel Scop      | 53 | Executive
  Officer and Director                
|Liora Ofer       | 50 | Director                                        
|Arieh Shaked     | 54 | Outside
  Director                              
|Tami Gottlib     | 47 | Outside
  Director& Chair of the Audit Committee
|Sasson Shilo     | 49 | VP &
  Chief Financial Officer and Secretary    
|Giora Gutman     | 52 | Industry
  Division President and Director      

The business experience, principal occupation and employment, as well
as the periods of service, of each of the board members and executive officers
of Baran are set forth below:

Meir Dor has served as a director and CEO of Baran since 1991 and has
served as the chairman of the board of directors of Baran since 1992. Mr. Dor
is also a director of the following Baran subsidiaries: Baran Advanced
Technologies (1986) Ltd., Baran Technical Products Management and Marketing
Ltd., H.A.J.I Ltd., Mobipower Ltd., A.R.- A.D.Y.R. Constructions Ltd.,
Meissner-Baran Ltd., Industrial Centers E.O.D. Ltd., Lead Control Ltd., Tefen
Industrial Engineering Management and Systems Analysis Ltd. and its
subsidiaries, InTime Ltd., B&W Projects Inc, Baran Raviv Thailand Ltd. and
Baran Telecom Inc. Mr. Dor received his B.Sc in Management and Industrial
Engineering from the University of Tel-Aviv, Israel in 1978.

Menachem Gal has served as a director of Baran since 1991, and has
served as co-managing director and head of business development of Baran since
the second half of 2001. Mr. Gal also serves as a director of the following
Baran subsidiaries: Baran Inbar Projects (1987) Ltd., Baran Energies
International Ltd., Notev - Management & Operation Ltd., Baran Engineering
and Projects (1983) Ltd., Baran Project Construction Ltd., Meissner-Baran Ltd.,
Baran Alrig Ltd,. H.A.J.I Ltd., Green Anchors Ltd., Baran Raviv Thailand Ltd.
and Nes-Pan Ltd.

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Abiel Raviv has served as a Senior Officer of Baran since 1993 and
served as a director of Baran since 1997, Mr. Raviv has also served as
co-managing director since 1994. Mr. Raviv served as a co-managing director of
Baran Raviv Startup and Entrepreneur Ltd. until 1997. Until 1999, Mr. Raviv
served as the head of Barans telecommunications division. Mr. Raviv serves as
a director of the following Baran subsidiaries: Baran Raviv Telecom Ltd.,
B&W Projects Inc., Baran Raviv Thailand Ltd., Baran Telecom Inc. Mr. Raviv
received his B.Sc. in Mechanical Engineering from Technion, Israel Institute of
Technology in 1970 and a M.Sc. in Mechanical Engineering (Turbomechanics) from
Union College, Schenectady, New York, in 1974.

Israel Gotman has served as a director and an Officer of Baran since
1991. Between the years 1990 and 2001, Mr. Gotman served as chief executive
officer of several of Barans subsidiaries. Mr. Gotman currently serves as a
director of Baran Industries (91) Ltd. Mr. Gotman holds a B.Sc. in Mechanical
Engineering from the Faculty of Mechanical Engineering, Moscow (1972).

Isaac Friedman has served as a director of Baran since 1991, until 2004
Mr. Friedman served as the head of the Civil Engineering Division of Baran.
Between the years 1990 and 1999, Mr. Friedman served as vice president of Baran
Project Construction Ltd., where he currently serves as chief executive
officer. Mr. Friedman serves as a director in the following Baran subsidiaries:
Baran Project Construction Ltd., A.R.- A.D.Y.R. Constructions Ltd. and Baran
Infrastructure & Construction Ltd. Mr. Friedman graduated as a Practical
Construction Engineer from the Technical College of the Negev, Beer-Sheva,
Israel in 1975, and received his B.Sc. in Business Management from Champlain
College, Illinois, in 2000.

Israel Scop has served as a director of Baran since 1991. Until 1998,
Mr. Scop served as vice president in Baran-Project Construction Ltd. Between
1998 and 2000, Mr. Scop acted as chief engineer of Barans engineering
companies. As of 2000, he is responsible for community relations and special
engineering projects for Baran. Mr. Scop holds a B.Sc. in Mechanical
Engineering from the Technion, Institute of Technology, Haifa, Israel (1972).

Liora Ofer has served as a director of Baran since 1999. During the past
five years Ms. Ofer has served in different roles in the Ofer Brothers group of
companies, including Israel Chemicals Ltd. and its subsidiaries, and has served
as the managing director of Almog Eilat Shore Ltd. Ms. Ofer also serves as a
director of a number of Israeli companies: United Mizrahi Bank Ltd., Ofer
Development and Investments Ltd., Malisron Ltd., Almog Eilat Shore Ltd., Neot
Almog Shore (1990) Ltd., Almog Hotel Management Ltd., Almog Shore Haifa (1996)
Ltd., Neve Almog Shore Ltd., Laguna Hotel Ltd., Oro Investments Ltd., Oro
Foreign Investments (1999) Ltd., Halidor Entrepreneurs Ltd., and Ofer Brothers
Assets (1957) Ltd. Ms. Offer is a member of the Audit Committee.

59

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Arieh Shaked has served as an outside director of Baran since 2000.
During the past five years Mr. Shaked has served as chairman of the board of
directors of a number of Israeli companies: Enosh Security and Maintenance
Ltd., Enosh Building Maintenance Ltd., Enosh Human Resources Services and
Security Eilat Ltd. Mr. Shaked is also a director of Arami Shaked 2000 Ltd. and
Nehushtan Investments Ltd. Mr. Shaked holds a BA in Political Sciences,
Business Management from Bar-Ilan University, Tel-Aviv, Israel (1982) and an MA
in Social Sciences and Mathematics from the University of Haifa, Israel (1989).
Mr. Shaked is a member of the Audit Committee.

Tami Gottlieb joined Baran as an outside director in July, 2002. Ms.
Gottlieb is currently joint owner and CEO of a private consulting
and investment banking company - Harvest Capital Markets
Ltd. and serves as a director in a number of Israeli companies:
Emilia Development (M.O.F.) Ltd., RoboGroup Ltd., Maalot - The Israeli
Rating Company Ltd., T.R.A. Tel Aviv Radio Ltd., Dan Transportation Company
Ltd., Incredimail Ltd., Hassin Esh Ltd., PolySack Ltd. and Credit Information
Association (CIA) Ltd. Between 1997 and 2001, Ms. Gottlieb served as CEO and
director of Investec General Management and Underwriting Ltd. prior to 1997 Ms.
Gottlieb served as CEO both at Oscar Gruss (Israel) Ltd. and before that at
Maalot - The Israeli Rating Company Ltd.. 
Ms. Gottlieb holds a BA in International Relations from The Hebrew
University, Jerusalem, Israel (1978) and an MA in Economics from Indiana
University Bloomington, Indiana, USA (1980). Ms. Gottlieb is a member of the
Audit Committee and serves as the boards financial expert.

Sasson Shilo joined Baran in 1992 and serves as Barans vice president
of finance and as secretary of Baran. Mr. Shilo serves as a director in the
following Baran subsidiaries: Baran Technical Products Management and Marketing
Ltd., , Enco Systems Projects (1997) Ltd., A. Etzion Consultants &
Engineers Ltd., Baran Alrig Ltd, Tefen Industrial Engineering Management and
Systems Analysis Ltd., Mobipower Ltd, BMEC Ltd., B&W Projects Inc. and
Industrial Centers E.O.D. Ltd. Mr. Shilo holds a BA in Economics from the Ben
Gurion University, Beer-Sheva, Israel from 1984 and an MBA in Business
Management from the Ben Gurion University, Beer-Sheva, Israel (1989).

Giora Gutman has served as a director of Baran since 2003 and in
various positions since joining the company in 1994. Mr. Gutman became Head of
the Industry Division and CEO of Baran Engineering & Projects (1983) Ltd.
in 2001. Mr. Gutman serves as a director in the following Baran subsidiaries:
Baran Engineering and Projects (1983) Ltd,. Lead Control Ltd., Baran Industries
(91) Ltd., Notev - Management & Operation Ltd., Intime Ltd., Carmel
Desalination Ltd., Tefen Industrial Engineering Management and Systems Analysis
Ltd. and Baran Inbar Projects (1987) Ltd. Mr. Gutman holds a B.Sc in
Mechanical Engineering from Ben Gurion University.

60

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Compensation

During 2003 Baran paid to all its directors and senior management as a
group an aggregate amount of NIS 4.2 million ($1million) in salaries, fees and
bonuses. Other than the payment to non-employee directors of NIS 173,000
(approximately $40,000) for their participation in board meetings, no directors
received cash compensation for serving in such positions in the year ended
December 2003.

Five highest compensated persons in Baran

|Position                                                     | Compensation             
|------------------------------------------------------------ | -------------------------
|Industry
  Division
  President and Director                 | NIS 1, 240,000 ($283,000)
|Former
  President, Chief
  Operation Officer and
  Director | NIS 875,003
  ($200,000) 
|Senior
  Executive Officer
  and Director                    | NIS 375,000
  ($86,000)  
|Senior
  Executive Officer
  and Director                    | NIS 375,000
  ($86,000)  
|Executive
  Officer and
  Director                           | NIS 375,000
  ($86,000)  

Board Practices

Barans Articles of Association provide that Barans board shall
consist of no less than three and no more than 13 directors. Each director who
is not an outside director is elected at an annual general meeting or a special
meeting of Barans shareholders by a vote of the holders of a majority of the
voting power represented and voting at that meeting. Outside directors are
elected and may be removed only in accordance with the provisions of the
Israeli Companies Law (described below). Barans Board currently consists of 13
directors, two of whom are outside directors. Each director who is not an
outside director will hold office until the next annual general meeting of
Barans shareholders, unless terminated earlier by a simple majority vote of
the shareholders at a general meeting, or if he or she becomes insane, is
declared bankrupt, or resigns, or upon his or her death.
A simple majority of Barans shareholders voting at a general meeting
may remove any of Barans directors, other than outside directors, from office
and may elect replacement directors or fill any vacancy in the board, other
than vacancies created by an outside director. Each of Barans co-managing
directors are considered to be executive officers, serve at the discretion of
the board and hold office until his or her successor is elected or until his or
her earlier resignation or removal. The other executive officers are appointed
by management, and terms of their employment are subject to the approval of the
board of directors. There are no family relationships among any of Barans
directors or executive officers.

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Under the Israeli Companies Law, companies incorporated under the laws
of the State of Israel whose shares are listed on an exchange, including the
Tel Aviv Stock Exchange or the Nasdaq National Market, are required to appoint
two outside directors. Arieh Shaked and Tami Gottlib were appointed as Barans
outside directors under the Israeli Companies Law. The Israeli Companies Law
provides that a person may not be appointed as an outside director if the
person, or the persons relative, partner, employer or any entity under the
persons control has or had during the two years preceding the date of
appointment any affiliation with the company or any entity controlling,
controlled by or under common control with the company. Outside directors may
be appointed only in accordance with the provisions of the Israeli Companies
Law as described below.

The term affiliation includes:

| |  | an
  employment relationship;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | a business
  or professional relationship maintained on a regular basis;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | control; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | service as
  an office holder, excluding service as a director for a period of not more
  than three months during which the company first offered its shares to the
  public. The term office holder is defined as a director, general manager,
  chief business manager, deputy general manager, vice general manager,
  executive vice president, vice president, other manager directly subordinate
  to the general manager or any other person assuming the responsibilities of
  any of the foregoing positions, without regard to such persons title.

No person can serve as an outside director if the persons position or
other business creates, or may create a conflict of interest with the persons
responsibilities as an outside director or may otherwise interfere with the
persons ability to serve as an outside director. If at the time an outside director
is appointed all current members of the board of directors are of the same
gender, then that outside director must be of the other gender.

Until the lapse of two years from termination of office, a company may
not engage an outside director to serve as an office holder and cannot employ
or receive services from that person, either directly or indirectly, including
through a corporation controlled by that person.

Outside directors are elected by a majority vote at a shareholders
meeting, provided that either:

| |  | the majority
  of shares voted at the meeting, including at least one-third of the shares of
  non-controlling shareholders voted at the meeting, vote in favor of the
  election of the outside director; or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                              
| |  | the total
  number of shares voted against the election of the outside director does not
  exceed one percent of the aggregate voting rights in the company.                                                 

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The initial term of an outside director is three years. The outside
director may be reelected to one additional term of three years by a majority
vote at a shareholders meeting, subject to the conditions described above for
election of outside directors. Outside directors may only be removed by the
same percentage of shareholders as is required for their election, or by a
court, and even then only if the outside directors cease to meet the statutory
requirements for their appointment or if they violate their duty of loyalty to
the company. If an outside directorship becomes vacant, a companys board of
directors is required under Israeli Companies Law to call a shareholders
meeting immediately to appoint a new outside director.

Each committee of a companys board of directors is required to include
at least one outside director and the audit committee is required to include
both outside directors. An outside director is entitled to compensation as
provided in regulations adopted under Israeli Companies Law and is otherwise
prohibited from receiving any other compensation, directly or indirectly, in
connection with services provided as an outside director.

Employees

As of December 31, 2003, Baran and its subsidiaries had employed
approximately 1,454 employees, approximately 1,189 of whom were based in
Israel, 106 in United States, 30 in United Kingdom, 104 in Germany, 18 in
Thailand and 7 in Africa. The breakdown of Barans employees by division is as
follows:

|Year endedDecember 31                |  | 2001  |  | 2002  |  | 2003  | 
|------------------------------------ |  | ----- |  | ----- |  | ----- | 
|                                     |  |       |  |       |  |       | 
|Baran
  management                   |  | 39    |  | 42    |  | 34    | 
|Communication
  division             |  | 380   |  | 645   |  | 416   | 
|Civil
  Engineering
  division       |  | 125   |  | 134   |  | 124   | 
|Industrial division                  |  | 490   |  | 466   |  | 440   | 
|Technology
  and
  Services division |  | 390   |  | 388   |  | 440   | 
|                                     |  |       |  |       |  |       | 
|Total                                |  | 1,424 |  | 1,675 |  | 1,454 | 
|                                     |  |       |  |       |  |       | 

Share Ownership

| |  | On November
  3, 2003 Barans board of directors resolved to approve an Employees Option
  Plan to Barans Israeli Employees. Five (5) employees of Baran and its
  subsidiaries participate in the Option Plan and will receive, up to 82,000
  options. The options are non-tradable registered bonds, and will be granted
  for no consideration. Each option grants the employee the right to purchase
  one Barans ordinary share par value 1.00 NIS each, against payment of the
  exercise price. The Shares will be registered for trade in the Tel-Aviv Stock
  Exchange.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |   | Each one of
  the employees, covered by the plan, is domiciled in Israel and is not a
  controlling shareholder and/or interested shareholder and/or director
  and/or CEO in the Baran, and will not become controlling shareholder and/or
  interested shareholder in Baran Group, following the grant of the options,
  based on the assumption that he/she will exercise all the options to be
  granted to him/her. On December 22, 2003, 74,000 options were granted under
  the plan.                                                                                                                                                                                                                                                                                                                                                         
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | The options
  granted are equally divided into two classes, series 1 options and series 2
  options. The exercise price for exercising the option and converting it into
  a share shall be as follows: The exercise price of series 1 options, shall be
  the price of the share in the Tel- Aviv Stock Exchange at the end of the
  trading date on the date of granting. The exercise price of series 2 options,
  shall be the price of the Share in the Tel- Aviv Stock Exchange at the end of
  the trading date on the date of granting plus $5; according to the
  representative rate known on the morning of the workers submission of his/her  notice to exercise options.                                                                                                                                                                       
| |   | The exercise
  period of each option shall be twelve months from the end of the barring
  period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   | The options
  shall be barred for a period of not less than twelve months (12) from the end
  of the tax year during which the options have been granted and deposited with
  the trustee. Half of the options are barred for a period of two years from
  their date of grant and the other half is barred for a period of three year
  from the date of their grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   | The option
  holders shall receive a bonus in NIS equal to $2 per option, in the event the
  options cannot be excised due to the fact the exercise price will be equal or
  lower than the share trading price. Please see Note 12 for more details.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | On December 1, 2003, Baran granted 74,000
  out of 116,000 options included in the 2003 Employees and Consultant Stock
  Option Plan, to its US domiciled employees, which was filed on November 11,
  2003. As a result of Barans decision on June 25, 2004 to delist its shares
  from the Nasdaq National Market, Baran requested removal from registration of
  the Shares registered for the purpose of the Stock Option Plan, to its US
  domiciled employees. Accordingly, on June 25, 2004 Baran filed a
  Post-Effective Amendment to the Registration Statement to deregister the
  116,000 Ordinary Shares issued for the Stock Option Plan, to its US domiciled
  employees. Baran US domiciled employees shall continue to enjoy the above
  Stock Option Plan and Baran intends to amend the Plan in accordance with the
  delisting decision.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   | Under the
  Plan, any employee of Baran or of an affiliate of Baran who is domiciled in
  the United States and certain consultants will be eligible to receive Stock
  Options awards, provided, the individual is not (i) an owner of Ordinary
  Shares representing more than five (5%) of the equity rights in the Company,
  (ii) a director of the Company, or (iii) a Baal Inyan (interested party) as
  that term is defined in Section 1 of the Israeli Securities Act.                                                                                                                                                                                                                                                                                                                                                                           

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| |  | A Stock
  Option granted under the Plan represents the right to purchase the number of
  Ordinary Shares of Baran, par value NIS 1.00 per share, set forth in the
  Option Agreement evidencing the Option. 
  When a Stock Option is granted the recipient becomes the owner of the
  Stock Option, subject to such vesting and forfeiture provisions as may be set
  forth in the Option Agreement.  Only
  upon exercise of the Stock Option, subject to the terms of the Stock Option
  Agreement, does the recipient become the owner of the Ordinary Shares subject
  to the Stock Option.  The Plan
  provides for the grant of Incentive Stock Options, which meet the criteria
  set forth in the Internal Revenue Code and non-qualified stock options which
  do not meet the criteria of the Internal Revenue Code.  The tax consequences to a participant vary
  depending upon whether his or her option is an Incentive Stock Option or a
  non-qualified stock option.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | The purchase
  price per share covered by each option is $7.02, which equaled the average
  price of a Barans shares on the Nasdaq National Market at the end of each of
  the fourteen (14) consecutive trading days, such period ending on the trading
  day immediately prior to the date of the grant of the options. The options
  granted are exercisable for a one-year period commencing on the second
  anniversary of the granting date and ending on the third anniversary of the
  granting date.  The period from the
  date of the granting of the options to the second anniversary of the date of
  the granting of the options is referred to as the Barring Period. The
  options may not be exercised after the third anniversary of the granting
  date.                                                                                                                                                                                                       

ITEM 7. 
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

Major Shareholders

The following table sets forth information as of June 28, 2004
concerning the beneficial ownership of the Baran ordinary shares by each
shareholder known by Baran to be the beneficial owner of more than 5% of the
outstanding shares, current members of the board of directors of Baran,
certain Baran executive officers, and all directors and current executive
officers as a group. Except as otherwise indicated, the business address for
each of the following persons is Baran House,8 Omarim St. Industrial Park, Omer
84965,Israel, as well as 5 Menachem Begin Ave., Beit Dagan 50200, Israel.

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|Name of Beneficial Owner                                     |  | Number of
  Shares
  Beneficially
  Owned |  | Percentage
  Beneficially
  Owned | 
|------------------------------------------------------------ |  | ----------------------------------------- |  | --------------------------------- | 
|                                                             |  |                                           |  |                                   | 
|Meir Dor (2)                                                 |  | 1,351,914                                 |  |                                   | 
|Bank Leumi
  LeIsrael B.M. Funds (1)                         |  | 1,134,681                                 |  |                                   | 
|Clal
  Insurance Enterprises Holdings Ltd                    |  | 701,436                                   |  |                                   | 
|Bank
  Hapoalim                                              |  | 421,695                                   |  |                                   | 
|Israel
  Gotman (2)                                          |  | 201,923                                   |  |                                   | 
|Israel Scop
  (2)                                            |  | 185,719                                   |  |                                   | 
|Abiel Raviv
  (2)                                            |  | 183,100                                   |  |                                   | 
|Menahem Gal
  (2)                                            |  | 129,252                                   |  |                                   | 
|Isaac
  Friedman (2)                                         |  | 88,615                                    |  |                                   | 
|Sasson Shilo                                                 |  | 11,000                                    |  |                                   | 
|Giora Gutman                                                 |  | 35,000                                    |  |                                   | 
|Liora Ofer                                                   |  | 0                                         |  |                                   | 
|                                                             |  |                                           |  |                                   | 
|Arieh Shaked                                                 |  | 0                                         |  |                                   | 
|                                                             |  |                                           |  |                                   | 
|Tami Gottlib                                                 |  | 0                                         |  |                                   | 
|                                                             |  |                                           |  |                                   | 
|All current
  officers and directors as a group (11 persons) |  | 2,186,523                                 |  |                                   | 

(1)Bank Leumi LeIsrael B.M. controls the voting shares of various
investment and other funds that own the Baran ordinary shares. These numbers of
shares are based on reports provided to Baran by the Bank.
(2) Meir Dor, Menachem Gal, Isaac Friedman, Israel Gotman, Abiel Raviv and
Israel Scop are directors of Baran and have entered into a voting agreement
pursuant to which they have agreed to vote their shares to elect directors of
Baran.

Related Party Transactions

On January 31, 2000 Baran entered into an agreement with a shareholder
of A.L.D. Advanced Logistics Development Ltd. (A.L.D.), whereby the parties
granted each other several rights with respect to the disposition of their
shares, determined the dividend distribution policy in the company and agree to
coordinate their voting with respect to the election of directors as well as
other matters to be voted on at Advanced Logistics general meeting of
shareholders. All such agreements are no longer valid as a result of the sale
of Baran holdings in A.L.D on May 31, 2004.

In addition, Baran has oral agreements with all its wholly owned
subsidiaries, pursuant to which Baran receives management fees from the
subsidiaries in amounts ranging from 4% to 5% of each subsidiarys annual
revenues. Baran has a written agreement with Tefen, pursuant to which Baran
receives consulting fees from Tefen in an amount equal to the cost of the
yearly compensation of a co-managing director in Tefen (NIS 1,038,000, $237,000
in 2003). Baran has a written agreement with A.L.D., pursuant to which Baran
receives consulting fees from A.L.D  in
an amount equal to the cost of the yearly compensation of the president of
A.L.D (NIS 324,000, $73,990 in 2003). The above agreement was automatically
terminated as a result of the sale of Baran holdings in A.L.D on May 31, 2004

On October 18, 1999, Mr. Raviv transferred all his rights in connection
with the appointment of directors of Baran to Meir Dor. During the year 2001,
Mr. Gal and Mr. Friedman transferred all their rights in connection with the
appointment of directors of Baran to Meir Dor, the above transfer shall remain
valid until its cancellation.

66

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On July 7, 1998, Baran and Baran Industries (1991) Ltd. entered into an
agreement with several shareholders of Tefen Industrial Engineering Management
and Systems Analysis Ltd. under which the parties granted each other several
rights with respect to their disposition and purchase of shares in Tefen, and
agree to coordinate their voting with respect to the election of directors as
well as other matters to be voted on at Tefens general meetings.

In an agreement dated March 27, 1992 Meir Dor, Menachem Gal, Isaac
Friedman, Israel Gotman, Jonathan Inbar and Israel Scop, agreed to coordinate
their vote with respect to the election of directors to the board of Baran as
well as other matters to be voted on at Barans general meetings of
shareholders and granted each other several rights with respect to the
disposition of their shares. The parties signed subsequent agreements with
Abiel Raviv, dated October 21, 1997 and October 7, 1998 joining Mr. Raviv to
the agreement, and modifying the manner in which directors shall be elected to
the Baran board. An addendum dated December 10, 2000 specified certain
conditions for the effectiveness of these agreements. An explanation regarding controlling
shareholders transactions and board of directors election under Israeli law may
be found in Item 10.

Legal Proceedings

During 2003 the number of legal claims in which Baran is a party
increased materially. This increase is a direct result of the recession in
Israel and economic slow down, as well as the high profile nature of Barans
projects, which leads to an automatic joinder of Baran as a party. Until now
the legal treatment resulted in remarkable achievements. A number of legal
claims held in Israel, the alleged sum of which reached millions of New Israeli
Shekels, were eventually settled for less than $20,000.  More details on Barans legal affairs appear
in Note 11 of the financial statements.

ITEM 8. FINANCIAL INFORMATION

Our consolidated financial statements are
incorporated herein by reference to pages F-1 through F-108.

ITEM 9. OFFERS AND LISTING

Market and Share Price History

Baran ordinary shares have been traded on the Tel Aviv Stock Exchange
under the symbol BRAN since March 26, 1992.

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The following table sets forth the high and low sales prices, in NIS,
of Baran ordinary shares as quoted on the Tel Aviv Stock Exchange for the
periods indicated:

|            |  | High  |  | Low   | 
|----------- |  | ----- |  | ----- | 
|2002        |  |       |  |       | 
|1st quarter |  | 97.53 |  | 77.34 | 
|2nd quarter |  | 79.49 |  | 43.30 | 
|3rd quarter |  | 50.10 |  | 26.86 | 
|4th quarter |  | 28.55 |  | 23.62 | 
|            |  |       |  |       | 
|2003        |  |       |  |       | 
|1st quarter |  | 35    |  | 26.37 | 
|2nd quarter |  | 39.24 |  | 33.1  | 
|3rd quarter |  | 38.5  |  | 24.98 | 
|4th quarter |  | 33.62 |  | 25.14 | 

The annual high and low market
prices for Baran ordinary shares (in NIS) for the five most recent full fiscal
years:

|     |  | High   |  | Low   | 
|---- |  | ------ |  | ----- | 
|2003 |  | 39.24  |  | 24.98 | 
|2002 |  | 97.53  |  | 23.62 | 
|2001 |  | 119.75 |  | 60.95 | 
|2000 |  | 161.65 |  | 93.84 | 
|1999 |  | 104.56 |  | 26.48 | 

The high and low market prices
for Baran ordinary shares (in NIS) for the most recent six months:

|                 |  | High  |  | Low   | 
|---------------- |  | ----- |  | ----- | 
|June 20,
  2004  |  | 28.12 |  | 26.69 | 
|May 30, 2004     |  | 33.06 |  | 26.11 | 
|April 31,
  2004 |  | 37.03 |  | 33.63 | 
|March 31,
  2004 |  | 37.87 |  | 29.29 | 
|February
  2004  |  | 32.76 |  | 29.6  | 
|January 2004     |  | 36.31 |  | 31.75 | 

On November 15, 2002, Barans shares commenced trading on the Nasdaq
National Market, under the symbol BRAN the following table sets forth, for
the periods indicated and available, the high and low reported sales prices of
the ordinary shares on the Nasdaq National Market:

The annual high and low market prices for Baran ordinary shares (in $)
for the two most recent full fiscal years:

|     |  | High |  | Low  | 
|---- |  | ---- |  | ---- | 
|2003 |  | 8.87 |  | 5.41 | 
|2002 |  | 8.48 |  | 5.32 | 

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|            |  | High |  | Low  | 
|----------- |  | ---- |  | ---- | 
|2003        |  |      |  |      | 
|1st quarter |  | 7.9  |  | 5.41 | 
|2nd quarter |  | 8.87 |  | 6.99 | 
|3rd quarter |  | 8.76 |  | 5.82 | 
|4th quarter |  | 7.6  |  | 5.63 | 

The high and low market prices for Baran ordinary shares (in $) for the
most recent six months:

|                 |  | High |  | Low  | 
|---------------- |  | ---- |  | ---- | 
|June 14,
  2004  |  | 6.01 |  | 5.88 | 
|May 30, 2004     |  | 7.34 |  | 5.75 | 
|April 31,
  2004 |  | 8.31 |  | 7.43 | 
|March 31,
  2004 |  | 8.1  |  | 6.43 | 
|February
  2004  |  | 7.58 |  | 6.51 | 
|January 2004     |  | 8.4  |  | 7.3  | 

Barans resolution to delist its shares from
the NASDAQ National Market

On June 25, 2004, Baran announced that Barans board of directors
resolved to concentrate the trading of its securities on the Tel-Aviv Stock
Exchange (hereunder, TASE) and
to voluntarily delist its shares from listing in the Nasdaq. In addition to
delisting Barans shares from Nasdaq, Baran currently intends, under applicable
SEC rules, to thereby cease filing annual and other reports with the SEC once
the delisting is effective by filing a Form 15. As part of the delisting
process, the board further resolved to file a post-effective amendment to
Barans registration statement on Form S-8, which was filed with the SEC late
last year in connection with Barans employee option incentive program for
United States employees, in order to deregister the unsold shares registered by
that registration statement.The deregistration process shall commence no later than July 10th,
2004. The board resolved to authorize Barans management to set the filing of
Form 15 timing and to take all measures and acts required for the
implementation of the deregistration process.

Barans plan to deregister its ordinary shares was made after careful
consideration of the advantages and disadvantages of continuing its share
registration in the United States and the rising costs and demands on
management time arising in connection with SEC and NASDAQ compliance
requirements. After considering the limited number of Barans US holders of record
and the low trade volume of Barans shares on NASDAQ, as well as the growing
internationalization of stock markets. And in light of the related high costs
and continuous increase in the onerous duties set upon Baran and its officers,
resulting of being a NASDAQ traded entity, the board resolved that the listing
is no longer justified. Baran is eligible to deregister because it has fewer
than 300 shareholders of record world-wide. Barans shares shall continue to
trade in the TASE and Baran shall continue to make public reports in accordance
with the Israeli Securities and Exchange Committee rules and regulations.

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The board believes that currently, burdens associated with being a
reporting company under the 1934 Act, including those arising under the
provisions of the Sarbanes-Oxley Act of 2002 outweigh the advantages of being a
dual-traded company. The board farther believes that since the registration of
Barans shares for trade in the NASDAQ, Barans chances to raise funds through
the NASDAQ in the near future have reduced and at present this possibility
seems improbable. It is the boards opinion that the deregistration resolution
is for the benefit of Baran and all its shareholders, including its US holders
of record, who will be able to continue their trade in Barans shares through
the TASE, where Baran enjoys a substantially higher trade volume.

Whether at some later point Baran will re-establish itself as
dual-traded is an open question and will be taken up at an appropriate time.
For the foreseeable future, the board believes that the best course is to
deregister Baran shares from trade in the NASDAQ and to remain listed in the
TASE.

ITEM 10. ADDITIONAL INFORMATION

Articles of Association

Under Israeli law, the founders of a company must present to the
Israeli Registrar of Companies the companys Articles of Association. Upon
receipt of a certificate of registration from the Registrar of Companies, the
company is considered duly incorporated. Following incorporation, an Israeli
company must notify the Registrar of Companies of, among other things, all
issuance of shares, amendments to the Articles of Association and the name and
addresses of its shareholders of record and directors. A company must also
submit to the Registrar of Companies the annual reports and, as Baran is a
publicly traded company, the audited financial statements that it submits to
its shareholders, which all become a matter of public record. Barans Israeli
incorporation number is 52- 003725-0.

Audit Committee

Under Israeli Companies Law, the board of directors of any company
whose shares are listed on any exchange must appoint an audit committee
comprised of at least three directors including all of the outside directors,
but excluding the:

| |  | chairman of
  the board of directors;                                                               
| | - | ----------------------------------------------------------------------------------------------------
| |  | general
  manager;                                                                                  
| |  | chief
  executive officer (or managing director);                                                   
| |  | controlling
  shareholder; and                                                                      
| |  | any director
  employed by the company or who provides services to the company on a regular
  basis.

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Barans board has appointed Tami Gottlib, Liora Ofer and Arieh Shaked
as members of its audit committee. Under Israeli Companies Law, the role of the
audit committee is to identify irregularities in the business management of the
company, in consultation with the internal auditor and the companys
independent accountants, and suggest an appropriate course of action.

Approval of Transactions with Office Holders
and Controlling Shareholders

The approval of the audit committee is required to effect specified
actions and transactions with office holders and controlling shareholders. The
term controlling shareholder, includes a shareholder that holds 50% or more of
the voting rights in a public company; if the company has no shareholder that
owns more than 50% of its voting rights, then the term also includes any
shareholder that holds 25% or more of the voting rights of the company. An
audit committee may not approve an action or a transaction with a controlling
shareholder or with an office holder unless at the time of approval the two
outside directors are serving as members of the audit committee and at least
one of them was present at the meeting at which the approval was granted.

Internal Auditor

Under the Israeli Companies Law, the board of directors must appoint an
internal auditor nominated by the audit committee. The role of the internal
auditor is to examine whether a companys actions comply with the law and
orderly business procedure. Under the Israeli Companies Law, the internal
auditor may be an employee of the company but may not be an interested party or
an office holder, an affiliate, or a relative of an interested party or an
office holder, nor may the internal auditor be the companys independent
accountant or its representative. An interested party is defined in the Israeli
Companies Law as a 5% or greater shareholder, any person or entity who has the
right to designate one director or more or the chief executive officer (or
managing director) of the company or any person who serves as a director or as
a chief executive officer (or managing director).

Approval of Specified Related Party
Transactions under Israeli Law

The Israeli Companies Law imposes a duty of care and a duty of loyalty
on all office holders of a company, including directors and executive officers.
The duty of care requires an office holder to act with the degree of care with
which a reasonable office holder in the same position would have acted under
the same circumstances. The duty of care includes a duty to use reasonable
means to obtain:

| |  | information
  on the appropriateness of a given action brought for his or her approval or
  performed by virtue of his or her position; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                            
| |  | all other
  important information pertaining to these actions.                                                                             

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The duty of loyalty of an office holder includes a duty to:

| |  | refrain from
  any conflict of interest between the performance of his or her duties to the
  company and his or her personal affairs;                                            
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                   
| |  | refrain from
  any activity that is competitive with the company;                                                                                                                 
| |   |                                                                                                                                                                                   
| |  | refrain from
  exploiting any business opportunity of the company to receive a personal gain
  for himself or herself or others; and                                              
| |   |                                                                                                                                                                                   
| |  | disclose to
  the company any information or documents relating to a companys affairs that
  the office holder received as a result of his or her position as an office
  holder.

The Israeli Companies Law requires that an office holder promptly
disclose any personal interest that he or she may have and all related material
information known to him or her relating to any existing or proposed
transaction by the company, and in any event not later than the first meeting
of the board of directors at which such transaction is considered. If the
transaction is an extraordinary transaction, the office holder must also
disclose any personal interest held by:

| |  | the office
  holders spouse, siblings, parents, grandparents, descendants, spouses
  descendants and the spouses of any of these people; or                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                          
| |  | any
  corporation in which the office holder is a 5% or greater shareholder,
  director or general manager or in which he or she has the right to appoint at
  least one director or the general manager.

Under the Israeli Companies Law, an extraordinary transaction is a
transaction:

| |  | other than
  in the ordinary course of business;                                                   
| | - | ---------------------------------------------------------------------------------------------------
| |   |                                                                                                    
| |  | that is not
  on market terms; or                                                                  
| |   |                                                                                                    
| |  | that is
  likely to have a material impact on the companys profitability, assets or
  liabilities.

Under the Israeli Companies Law, once an office holder complies with
the above disclosure requirement, the board of directors may approve a
transaction between the company and an office holder, or a third party in which
an office holder has a personal interest, however, a transaction that is
adverse to the companys interest may not be approved. If the transaction is an
extraordinary transaction, both the audit committee and the board of directors
must approve the transaction. Under specific circumstances, shareholder
approval may also be required. A director who has a personal interest in a
transaction, other than a transaction which is not an extraordinary
transaction, and which is considered at a meeting of the board of directors or
the audit committee, may not be present at this meeting or vote on this matter
unless a majority of the directors or members of the audit committee have a
personal interest in the matter. If a majority of the directors have a personal
interest in the matter, the transaction also requires the approval of the
shareholders of the company.

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Under the Israeli Companies Law, all arrangements as to compensation of
office holders who are not directors require approval by the board of
directors, and any undertaking to indemnify or insure an office holder who is
not a director requires both board and audit committee approval. In general,
arrangements regarding the compensation, indemnification and insurance of
directors require audit committee and shareholders approval in addition to
board approval.

Under the Israeli Companies Law, the disclosure requirements, which
apply to an office holder, also apply to a controlling shareholder of a public
company. Extraordinary transactions with a controlling shareholder or in which
a controlling shareholder has a personal interest, and the terms of
compensation of a controlling shareholder who is an office holder, require the
approval of the audit committee, the board of directors and a majority of the
shareholders of the company. In addition, the shareholders approval must
fulfill one of the following requirements:

| |  | at least
  one-third of the shareholders who have no personal interest in the
  transaction and are present and voting, in person, by proxy or by written
  ballot, at the meeting must vote in favor of approving the transaction; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                       
| |  | the
  shareholders who have no personal interest in the transaction who vote
  against the transaction may not represent more than 1% of the voting rights
  in the company.                                                          

Under Israeli Companies Law, a shareholder has a duty to refrain from
abusing his or her power in the company and to act in good faith and in an
acceptable manner in exercising its rights and performing its obligations to
the company and the other shareholders, including, among other things, voting
at general meetings of shareholders on the following matters:

| |  | an amendment
  to the articles of association;                             
| | - | ---------------------------------------------------------------------------
| |  | an increase
  in the companys authorized share capital;                   
| |  | a merger;
  and                                                            
| |  | approval of
  related party transactions that require shareholder approval.

In addition, any controlling shareholder, any shareholder who knows
that his or her vote can determine the outcome of a shareholder vote and any
shareholder who, under the companys articles of association, can appoint or
prevent the appointment of an office holder, is required to act with fairness
towards the company. The Israeli Companies Law does not describe the substance
of this duty and there is no binding case law that addresses this subject
directly. The above also applies to any voting agreement among shareholders of
the company.

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Exculpation, Insurance and Indemnification of
Directors and Officers

Under Israeli Companies Law, an Israeli company may not exculpate an
office holder from liability for a breach of the duty of loyalty of the office
holder. However, the company may approve an act which otherwise will be treated
as a breach of the duty of loyalty of an office holder provided that the office
holder is acting in good faith, the act or its approval does not harm the
company, and the office holder discloses the nature of his or her personal
interest in the act and all material facts and documents a reasonable time
before discussion of the approval. An Israeli company may exculpate an office
holder in advance from liability to the company, in whole or in part, for a
breach of duty of care but only if a provision authorizing such exculpation is
inserted in its Articles of Association. Barans current Articles of
Association do not include such a provision. An Israeli company may indemnify
an office holder in respect of certain liabilities either in advance of an
event or following an event provided that a provision authorizing such
indemnification is inserted in its Articles of Association, and provided that
the indemnification undertaking is limited to foreseeable liabilities and was
in reasonable amounts as determined by the board of directors. Barans Articles
of Association contain such a provision, and limit it further by stating that
the aggregate indemnification amount will not exceed 25% of Barans net equity,
as stated in its most recent financial reports before the actual
indemnification. Baran may indemnify an office holder against the following
liabilities incurred for acts performed as an office holder:

| |  | a financial
  liability imposed on him or her in favor of another person pursuant to a
  judgment, settlement or arbitrators award approved by court; and                                                                                                                                                                                                                                             
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | reasonable
  litigation expenses, including attorneys fees, incurred by the office holder
  or imposed by a court in proceedings instituted against him or her by the
  company, on its behalf or by a third party, or in connection with criminal
  proceedings in which the office holder was acquitted or as a result of a
  conviction for a crime that does not require proof of criminal intent.

An Israeli company may insure an office holder against the following
liabilities incurred for acts performed as an office holder:

| |  | a breach of
  duty of loyalty to the company, to the extent that the office holder acted in
  good faith and had a reasonable basis to believe that the act would not
  prejudice the company;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                               
| |  | a breach of
  duty of care to the company or to a third party; and                                                                                                                            
| |   |                                                                                                                                                                                               
| |  | a financial
  liability imposed on the office holder in favor of a third party.                                                                                                               

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An Israeli company may not indemnify or insure an office holder against
any of the following:

| |  | a breach of
  duty of loyalty, except to the extent that the office holder acted in good
  faith and had a reasonable basis to believe that the act would not prejudice
  the company;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                       
| |  | a breach of
  duty of care committed intentionally or recklessly;                                                                                                                     
| |   |                                                                                                                                                                                       
| |  | an act or
  omission committed with intent to derive illegal personal benefit; or                                                                                                     
| |   |                                                                                                                                                                                       
| |  | a fine
  levied against the office holder.                                                                                                                                            

Under the Israeli Companies Law, exculpation, indemnification and
insurance of office holders must be approved by the audit committee and the
board of directors of a company, and, in respect of its directors, by the
shareholders. Barans directors and office holders are currently covered by a
directors and officers liability insurance policy, which has an aggregate
claims limit of $15 million, no claims for directors and officers liability
insurance have been filed under this policy.

Baran has entered into agreements with each of its office holders
undertaking to indemnify them to the fullest extent permitted by its Articles
of Association. The procuring of insurance is subject to Barans discretion
depending on its availability, effectiveness and cost. In the view of the U.S.
Securities and Exchange Commission, however, indemnification of directors and
officers for liabilities arising under the Securities Act is against public
policy and therefore unenforceable.

Barans board may declare a dividend to be paid to the holders of
ordinary shares in proportion to the shares of the company that they hold.
Dividends may only be paid out of profits and other surplus funds, as defined
in the Israeli Companies Law, as of the end of the most recent fiscal year or as accrued over a period of the most recent two
years, whichever is higher, provided that there is no reasonable concern that a
payment of a dividend will prevent Baran from satisfying existing and
foreseeable obligations as they become due.

In the case of a share dividend or bonus shares, holders of each class
of shares can receive shares of the same class that confer upon the holder the
right to receive the share dividend or shares of another class whether the class
was preexisting or was created for the purpose of issuing the share dividend or
bonus shares, or a combination of such classes of shares.

The Board of Directors may, before offering any dividend whatsoever,
set aside certain amounts from the Companys profits as it sees fit, as a
reserve to be kept for certain purposes, and the Board can invest the sums that
have been so set aside in such investments as it sees fit, and it may from time
to time deal with these investments and change them and use all or some of them
for the Companys benefit, and the Board may use the reserve or any part of it
in the Companys business, without being required to hold it separately from
the Companys other assets. Subject to all of the special or limited rights
attached to any of the shares, a cash dividend will be distributed to
shareholders proportionately to the paid-in capital on the par value of the
shares held by them, without regard for the premium paid for the shares.

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The Board of Directors may from time to time determine the manner of
the payment of the dividends or the distribution of stock dividends and the
arrangements relating to this with respect to the shareholders.  Without limiting the generality of the
above, the Board of Directors may pay any dividends or funds for shares by
sending a check by mail to the shareholders address as it is recorded in the
shareholders register.  The shareholder
will bear the risk with regard to any such mailing of a check.

On those occasions when the Board of Directors provides for the payment
of dividends, or the distribution of shares or debentures out of the Companys
capital, or the granting of a right to subscribe for shares that have not yet
been issued and which are offered to shareholders against the delivery of an
appropriate coupon which is attached to the shareholders share certificates,
such payment, distribution or granting of a right to subscribe against an
appropriate coupon to the holder of the said coupon will constitute a discharge
of the Companys debt with respect to such activity to any person claiming a
right to such payment, distribution, or granting of a right to subscribe,
whichever is relevant.

The Board of Directors may defer the payment of a dividend, benefit, or
right that was to be paid for shares regarding which the Company has a lien,
and to use the consideration received upon the forfeiture of such for the
purpose of paying the debts for which the Company has the lien.

The transfer of a share will not give the transferee the right to receive
a dividend or any other distribution which is declared after the date of the
transfer of the share and before the transfer of the share is recorded, except
that in the event that the transfer of the share requires the approval of the
Board of Directors, the date of such approval will for this purpose take the
place of the date on which the transfer is recorded. If payment of a dividend
is not demanded within a period of 7 years from the date on which its
distribution applies, the party entitled to it will be viewed as having waived
it and the payment will be restored to the Companys ownership.

The Board of Directors may deduct from any dividend, grant or other
monies that are to be paid in connection with shares that are held by a
shareholder, whether such shareholder is the sole owner or owns it jointly with
another shareholder, any amounts of money owed by the shareholder which he
alone is required to pay to the Company or which he is required to pay to the
Company together with any other person, such as payments to be made in response
to demands for payment, and such-like. In the event that there are joint
holders of a single share, either one of them can give a valid receipt for any
dividend that is paid on that share, or for any other funds or privileges given
in relation to that share.

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Barans ordinary shares do not have cumulative voting rights for the
election of directors. As a result, the holders of Barans ordinary shares that
represent more than 50 percent of the voting power present or represented at a
shareholders meeting have the power to elect or remove any or all of Barans
directors, subject to special approval requirements for outside directors
described above.

In the event of Barans liquidation, after satisfaction of liabilities
to creditors, Barans assets will be distributed to the holders of ordinary
shares in proportion to the nominal value of their respective shares. This
right may be affected by the grant of preferential dividend or distribution
rights to the holders of a class of shares with preferential rights that may be
authorized in the future.

Baran is required to convene an annual meeting of its shareholders once
every calendar year within a period of not more than 15 months following the
preceding annual general meeting. Barans board is required to convene a
special meeting of its shareholders at the request of two directors or one
quarter of the members of its board or at the request of one or more holders of
5% or more of its share capital and 1% of its voting power or the holder or
holders of 5% or more of its voting power. Shareholder meetings require prior
notice of at least 21 days, or under certain circumstances, 14 days. The
chairman of Barans board or any director appointed the chairman or the
secretary of Baran presides over its shareholder meetings.

Under the Israeli Companies Law, Baran is not required to send out
proxy statements to its shareholders in connection with an annual or special
meeting. Baran must provide notice of any shareholders meeting, which notice
shall include the agenda for the meeting. The Israeli Companies Law permits a
company to allow its shareholders, if so permitted by its Articles of
Association, to vote by written proxy, by appointing a representative with a
power of attorney to vote at the shareholders meeting on behalf of the
shareholders.

Baran has adopted a provision in its Articles of Association permitting
voting by proxy. When Baran solicits the votes of its shareholders in the
United States, it sends proxy cards to them. The Israeli Companies Law also
permits shareholders to vote by written ballot by signing a voting instrument
attached to the proxy statement; however, this provision of the law is not yet
in force, and will only take effect
once the Minister of Justice issues regulations providing the procedure for
such vote. Holders of Baran ordinary shares have one vote for each ordinary
share held on all matters submitted to a vote of shareholders at a shareholder
meeting. Shareholders may vote at shareholder meetings either in person or by
proxy. Israeli law does not provide for public companies such as Baran to have
shareholder resolutions adopted by means of a written consent in lieu of a
shareholder meeting. Shareholder voting rights may be affected by the grant of
any special voting rights to the holders of a class of shares with preferential
rights that may be authorized in the future. The Israeli Companies Law provides
that a shareholder, in exercising his or her rights and performing his or her
obligations toward the company and its other shareholders, must act in good
faith and in an acceptable manner, and avoid abusing his or her powers. This is
required, when, for example, voting at shareholder meetings on matters such as
changes to the Articles of Association, increasing the companys registered
capital, mergers and approval of related party transactions. A shareholder must
also avoid oppression of other shareholders. In addition, any controlling
shareholder, any shareholder who knows that his or her vote can determine the
outcome of a shareholder vote and any shareholder who, under the companys
Articles of Association, can appoint or prevent the appointment of an office
holder, is required to act with fairness towards the company. The Israeli
Companies Law does not describe the substance of this duty and there is no
binding case law that addresses this subject directly. Any voting agreement is
also subject to observance of these duties.

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An ordinary resolution requires approval by the holders of a simple
majority of the voting rights represented at the meeting, in person, by proxy
or by written ballot (if permitted), and voting on the resolution. Under the
Israeli Companies Law, a resolution for the winding up of the company or for
changing its Articles of Association requires approval by holders of 75% of the
voting rights represented at the meeting, in person, by proxy or by written
ballot (if permitted) and voting on the resolution. Unless otherwise provided
in the Articles of Association or the Israeli Companies Law, all other
resolutions of Baran shareholders require a simple majority.

The quorum required for a shareholder meeting consists of at least two
shareholders present, in person or by proxy, who hold or represent between them
at least 25% of Barans issued share capital. If a quorum is not present within
30 minutes from the time scheduled for the meeting, the meeting will be
cancelled.

All of Barans issued and outstanding ordinary shares are duly
authorized, validly issued and fully paid. Barans ordinary shares are not
redeemable and have no preemptive rights.

The ownership or voting of ordinary shares by non-residents of Israel
is not restricted in any way by Barans Articles of Association, or the laws of
the State of Israel, except that citizens of countries which are, or have been,
in a state of war with Israel may not be recognized as owners of ordinary
shares.

Issuance of shares to a person holding 5% or more of the companys
shares or that will become 5% shareholder, requires the approval of the general
meeting, in addition to the board of directors approval. Other issuance of
shares to interested parties is subject to several restrictions.

The approval of a merger will be given in a resolution of the general
meeting adopted by an ordinary majority.

Through a resolution adopted by a regular majority, Baran may:

| |  | Enlarge its
  share capital in an amount to be decided, through the creation of new shares
  at a par value, with terms and rights as shall be decided.  Such a decision can be taken whether or
  not all the existing shares have been issued or a resolution has been made to
  issue them, or whether they have not all been issued or a resolution has not
  been made to issue all of them.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | Issue shares
  whether they are included in its original capital or are the result of an
  increase in the share capital, giving them either preferential or subordinate
  rights, or issue shares from the capital that has not yet been issued that
  will be redemption shares and redeem them, or issue shares and give them
  special limited rights or limitations in connection with the distribution of
  dividends, voting rights, repayment of capital, or in connection with other
  matters as may be determined in the resolution.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Issue
  redemption shares and to redeem them, to the extent permitted by law.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Unless the
  terms of the issuance of such shares provide otherwise, to convert, cancel,
  exchange, expand, add or change in any other manner the rights, preferences,
  advantages, limitations and provisions connected to or that are not at such
  time connected to any of the classes of shares.                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Cancel
  authorized share capital that has not yet been issued, to the extent
  permitted by law.                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Combine and
  re-divide its share capital into shares with larger par values than the
  existing par values.                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Re-divide
  all or some of its share capital through a redistribution of the existing
  shares into shares of smaller par value than that of the existing shares, in
  accordance with the provisions of the law.                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Reduce its
  share capital, in the same manner and under the same conditions, and subject
  to having obtained the approvals as required by law.                                                                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | The special
  rights granted to holders of shares or of a class of shares that have been
  issued, including shares that have been issued with senior rights or other
  special rights, will not be considered to have been changed by the creation
  or issuance of additional shares of the same rank, unless otherwise provided
  in the terms of the issuance of those shares.                                                                                                                                                             

Any change, conversion, cancellation, expansion, addition or other
change in the rights, preferences, advantages, limitations or provisions
connected with a specific class of shares that has been issued to shareholders
of Baran shall be subject to the consent of the holders of the outstanding
shares of that class, such consent to be given in writing by the owners of all
outstanding shares of that class, or by a resolution adopted by an ordinary
majority at the meeting of shareholders of that class  i.e., a class
shareholder meeting.

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The Board of Directors may, in its discretion, resolve any difficulty
that may arise in order to carry out any such resolution.  Without limiting the said authority of the
Board of Directors, in the event that as a result of a combination of shares,
there are shareholders, the combination of whose shares leaves them with
fractional shares, the Board of Directors may:

| |  | Sell the
  total of all the fractional shares, and appoint a trustee for this purpose in
  whose name the certificates will be issued for the shares made up of the
  fractions, which will be sold and the consideration for which will be
  distributed to the entitled shareholders, after deducting fees and expenses;
  or                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | Allot to
  each of the shareholders regarding whom the combination has left with
  fractional shares, shares of the same class as were held before the
  combination, paid in full, in an amount, which after being combined with the
  fractional share will come to a single full combined share. Such allotment will
  be considered to have taken effect immediately before the combination;                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | Determine
  that the shareholders will not be entitled to receive a combined share for
  any fraction of a combined share that results from a combination of half or
  less than the number of shares the combination of which creates one single
  combined share.  Such shareholders
  will be entitled to receive one combined share only for every fraction of a
  combined share that results from the combination of shares that number more
  than half of the number of shares the combination of which creates one single
  combined share.

In the event the board action taken requires the issuance of additional
shares, then the payment shall be done in the manner in which dividend shares
may be paid up.  Such combinations and
divisions will not be considered to be a change in the rights of the shares
that are the subject of the combination and division.

In any event of a combination of shares into shares with a larger par
value, the Board of Directors may establish arrangements for the purpose of
overcoming any difficulty that may arise in connection with the combination,
and the board is permitted to determine which shares are to be combined into a
particular share or into another. In the event of combination of shares that
are not owned by the same owners, the Board may establish arrangements for the
sale of the combined share, the manner of its sale and the manner of
distribution of the net consideration received, and to appoint a person who
shall carry out the transfer, and every action taken by such person shall be
valid and may not be challenged.

Subject to the provisions of the Articles of Association, the Board of
Directors may issue shares and other securities which are convertible or which
may be realized as shares, up to the limit of the Companys authorized share
capital.  It may, within the scope of
the authority thus granted to it, and in return for cash or other form of
consideration, issue shares (or otherwise deal with them), and with those reservations
and conditions, whether regarding the premium paid, the par value or the
deduction, and at those times that it sees fit, and to grant to any person the
right to demand the issuance of shares during a particular period, and for such
consideration as the Board of Directors may determine.

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In the event that Barans shares are offered for sale, there is no
obligation to make a similar offer to all or to some of the holders of the
Companys shares. Upon the issuance of shares, the Board of Directors may
establish various conditions for the shareholders, with regard to
consideration, the amounts the payment of which is demanded and/or the time of
the payment of such shares.

Material Contracts

As part of a compromise agreement, a consortium, which is composed of
Baran (50%) and Ionics Inc. (50%), was announced by Mekorot The Water Company
(the Israeli National Water Company), as the exclusive winner of a tender to
the construction of a water desalination facility in Ashdod, Israel. The
project will be erected on a Turn Key basis and its construction estimated
cost is approximately $95 million.

On July 4, 2003 BMD was awarded the exclusive right to negotiate the
performance of a bid for the construction and operation in Romania of a 13 KM,
four lanes and four bridges highway. The construction of the project shall be
accomplished within two years and BMD will be granted with the right to operate
the highway for 10 years. The estimated cost of the project is approximately 25
million Euro and the expected income is approximately 46 million Euro, during
10 years.

On October 23, 2003, Nes Pan Ltd., which is held (50%) by Baran, has
entered, as a partner, into a real estate project in Toronto Canada. The
Project includes the construction of about 470 dwelling units in an area next
to Lake Ontario in Toronto, Canada. The value of the Project is approximately
95 million Canadian Dollars. Nes Pans Ltd. share in the Project shall be 45%
(consequently Barans share is 22.5%) and 50% in the control of the Project; 45%
of the Project are held by another Israeli Company and the rest 10% are held by
an American financial investor.The construction of the Project and its progression is conditioned upon
the scope of early sales of the dwelling unites, and expected to commence on
the beginning of 2004 and last approximately two years.

On May 31st, 2004 the Companys board of directors resolved
to approve the sale of Baran holdings in A.L.D Advanced Logistics Developments
Ltd. (A.L.D), amounting to 50.5%
of A.L.Ds issued capital, to Dr. Zigmond Bluvband, for consideration in the
sum of $1.65 million. Baran resolution to sell its holdings in A.L.D resulted
from the fact that A.L.Ds activity is external to Barans core business scope.
The above sale is in consistence with Barans policy as of mid 2003, to focus
Barans activity on its core business, i.e. engineering, technology and construction
solutions global services and following reduce in none engineering
activities

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Exchange Controls

Under Israeli law, non-residents of Israel who purchase ordinary shares
with certain non-Israeli currencies (including US dollars) may freely
repatriate in such non-Israeli currencies all amounts received in Israeli
currency in respect of the ordinary shares, whether as a dividend, as a
liquidating distribution, or as proceeds from any sale in Israel of the
ordinary shares, provided in each case that any applicable Israeli income tax
is paid or withheld on such amounts. The conversion into the non-Israeli
currency must be made at the rate of exchange prevailing at the time of
conversion. Under Israeli law and our companys Memorandum and Articles of
Association both residents and non-residents of Israel may freely hold, vote
and trade ordinary shares.

Israeli Taxation

The following discussion is not intended to constitute a complete
analysis of all tax consequences relating to the receipt, ownership or
disposition of Barans ordinary shares and does not address any non-income tax
or any non-Israeli tax consequences of the merger. On July 24, 2002, the Law
for Amendment of the Income Tax Ordinance (Amendment No. 132), 2002 (the
Amendment) was enacted by the Israeli authorities. This Amendment became effective as of January 1, 2003.

Taxation of Baran Shareholders Capital Gains
on Sales of Baran Ordinary Shares

Israeli law imposes a capital gains tax on the sale of capital assets.
The law distinguishes between real gain and inflationary surplus. The
inflationary surplus is a portion of the total capital gain that is equivalent
to the increase of the relevant assets purchase price, which is attributable
to the increase in the Israeli consumer price index between the date of
purchase and the date of sale. Foreign residents, as described below, who
purchased an asset in non-Israeli currency, may request that the inflationary
surplus will be computed on the basis of the devaluation of the NIS against
such foreign currency. The real gain is the excess of the total capital gain
over the inflationary surplus. The inflationary surplus accumulated from and
after December 31, 1993, is exempt from any capital gains tax in Israel while
the real gain is added to ordinary income, which is currently taxed at ordinary
rates of up to 50% for individuals and 36% for corporations. Currently, sales
of ordinary shares of Israeli public companies whose shares are quoted on the
Tel Aviv Stock Exchange (such as Baran) are generally exempt from Israeli
capital gain tax. Dealers in securities in Israel or any other seller whose
income from selling shares is classified as current income and not as capital
gain under the Income Tax Law (Inflationary Adjustment), 1985, are taxed at
regular tax rates applicable to business income.

A foreign resident is a person who is not an Israeli resident. An
Israeli resident is: an entity registered in Israel whose principal activity is
in Israel, an entity that is registered as a foreign company, if it elects to
be treated as an Israeli resident. This election is irrevocable for the three
tax years after the election, unless the entity obtains a special permit. Under
the Amendment, as of the effective date, any corporation that incorporated in
Israel, an entity over which control and the management of its business are
exercised in Israel, an individual residing in Israel, except for temporary
absences, which do not contradict the individuals claim of residence in
Israel, would be considered an Israeli resident.

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Pursuant to the Amendment, the above-described exemption on capital
gains on sales by Israeli residents of listed securities, which were accrued
since the effective date will be terminated. Under the Amendment, the general
rate of capital gains will be reduced to 25% and the rate of capital gains on
sales of publicly traded securities will be 15%. Shareholders whose income from
selling Barans shares is classified as business profits (in contrast to
capital gain) would be taxed at ordinary income tax rates (up to 50% for
individuals and 36% for corporations).

Under the Amendment, the exemption on capital gain of foreign residents
from selling publicly traded securities on the Tel Aviv Stock Exchange will
continue to apply, and therefore the Amendment will not affect any tax
exemptions applicable to foreign residents prior to the effective date.

Israeli Taxation of Non-Israeli Holders of
Shares

Israeli law provides that non-Israeli residents are subject to capital
gains tax on the gains from the sale of a capital asset (including securities)
in Israel or an asset located outside Israel that is a right, direct or
indirect, to an asset in Israel unless an exemption is provided under any
provision of a double-taxation treaty with Israel. Under the double-taxation
treaty between Israel and the U.S. (the Treaty), Israeli capital gains tax
will not apply to the sale, exchange or disposition of ordinary shares by a
person who qualifies as a resident of the United States within the meaning of
the Treaty, and who is entitled to claim the benefits available to the person
by the Treaty.

This exemption will not apply, among other cases, if the gain is
attributable to a permanent establishment of such person in Israel, or if the
U.S. resident holds, directly or indirectly, shares representing 10% or more of
Barans voting power during any part of the 12-month period preceding the sale,
exchange or disposition, subject to certain conditions. In this case, the sale,
exchange or disposition would be subject to Israeli tax, to the extent
applicable. However, the U.S. resident generally would be permitted to claim a
credit for the taxes against the U.S. federal income tax imposed on the sale,
exchange or disposition, subject to the limitations in U.S. laws applicable to
foreign tax credits. The Treaty does not apply to U.S. state or local taxes.
Sales of Baran ordinary shares by non-Israeli holders, whether on the Tel Aviv
Stock Exchange or on the Nasdaq National Market, would be exempt from Israeli
capital gains tax under the Amendment as long as the shares are listed on the
Tel Aviv Stock Exchange. Non-residents of Israel are subject to tax on income
accrued or derived from sources in Israel or received in Israel. These sources
of income include passive income such as dividends, royalties and interest, as
well as non-passive income, such as income received for services rendered in
Israel. Baran is required to withhold income tax at the rate of 25% (or 15% for
dividends distributed from certain income generated by an entity, such as two
of Barans subsidiaries, that enjoys approved enterprise status under certain
Israeli tax incentive law) unless a different rate or an exemption is provided
in a tax treaty between Israel and the shareholders country of residence.
Under the Treaty, the maximum rate on dividends paid to a U.S. resident is 25%.
In addition, under the Treaty, if the income out of which the dividend is being
paid is not attributable to an approved enterprise and the non-resident is a
U.S. corporation that holds 10% of Barans voting power for a certain minimum
period, the rate is generally 12.5%. Under an amendment to the Inflationary Adjustments
Law, non-Israeli corporations may be subject to Israeli taxes on the sale of
shares in an Israeli company, which shares are traded on certain stock markets,
including the Nasdaq National Market, subject to the provisions of any
applicable double taxation treaty.

83

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Documents on Display

We are required to file reports and other information with the SEC
under the Exchange Act and the regulations thereunder applicable to foreign
private issuers. Reports and other information filed by us with the SEC may be
inspected and copied at the SECs public reference facilities described below.
Although as a foreign private issuer we are not required to file periodic
information as frequently or as promptly as United States companies, we
generally do publicly announce our quarterly and year-end results promptly and
file periodic information with the SEC under cover of Form 6-K. As a foreign
private issuer, we are also exempt from the rules under the Exchange Act
prescribing the furnishing and content of proxy statements and our officers,
directors and principal shareholders are exempt from the reporting and other
provisions in Section 16 of the Exchange Act.

You may review a copy of our filings with the SEC, including any
exhibits and schedules, at the SECs public reference facilities in Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices
of the SEC located at the Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. You may also obtain copies of such
materials from the Public Reference Section of the SEC, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You
may call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms. In addition, such information concerning our company can be inspected
and copied at the offices of the National Association of Securities Dealers,
Inc., 9513 Key West Avenue, Rockville, Maryland 20850 and at the offices of the
Israel Securities Authority at 22 Kanfei Nesharim St., Jerusalem, Israel.

You may read and copy any reports, statements or other information that
we file with the SEC at the SEC facilities listed above. These SEC filings are
also available to the public from commercial document retrieval services. We
also make available on our own Web site (www.barangroup.com) all our quarterly
and year-end financial statements as well as other information.

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Any statement in this annual report about any of our contracts or other
documents is not necessarily complete. If the contract or document is filed as
an exhibit to the registration statement, the contract or document is deemed to
modify the description contained in this annual report. We urge you to review
the exhibits themselves for a complete description of the contract or document.

ITEM 11. QUANTATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK

Market risk is the risk of loss related to changes in market prices,
including interest rates and foreign exchange rates of financial instruments
that may adversely impact our consolidated financial position, results of
operations or cash flows. The currency of the primary economic environment in
which we conduct our operation is the New Israeli Shekel. During fiscal 2003,
Baran derived approximately 74% of its revenues from projects performed in
Israel (functional currency NIS), approximately 14% from the sale of products
in the United States (functional currency US$), approximately 10% from projects
performed in Europe (functional currency Euro), and approximately 2% from
projects performed all over (such as Thailand and South Africa). Most of the
expenses and revenues are incurred in NIS, US$ and Euro. Thus, our primary
market risk exposures relate to interest rate movements and borrowing and to
exchange rate movements on foreign currency in Israel. Baran takes various
measures to compensate for the effects of both fluctuations in exchange rates
and interest rates as detailed.

Foreign Exchange Risk and Interest Rates

Baran invests available cash in low risk instruments, such as
government bonds issued by the Israeli government. Baran manages its exposure
to financial risks closely, and evaluates the status of these risks twice a
month. As a significant portion of Barans revenues and costs are derived or
incurred in Israel, Europe, United States and the Far East, fluctuations in the
exchange rate between the Israeli currency, the dollar and the Euro may have a
significant effect on the results of operations of Baran.

Baran has not entered into any hedging transactions with respect to
exchange rates related to its current projects, because the related income and
expenses for the majority of those projects are in Israeli currency.

With respect to large scaled and long term projects, in Israel, in
which the consideration to be received by Baran is linked to the US dollar,
Baran tries to correlate the bases of income and expenses in order to prevent
exposure to fluctuations in the exchange rates. In these projects, receipts and
advances are usually linked to the currency in which most of the related
expenditures will be incurred.

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Barans non-Israeli-based companies typically carry out their
activities in the local currency, so that the revenues from those activities
are not exposed to fluctuations in exchange rates. Conversion of those
companies results of operations into Israeli currency for the purpose of
inclusion in the consolidated financial statements is made in accordance with
the principles detailed in note 1 to Barans financial statements.

Companies that conduct transactions that are linked to foreign
currency, or transactions directly with suppliers outside of Israel, generally
link the payment under those transactions to the currency in which the
transactions are performed. Any gaps in the linkage are attributed by Baran to
financing expenses.

Due to the continuous increase in Barans activity in projects outside
of Israel or with foreign customers, a large part of the groups activity is
not carried out in Israeli currency, but rather in local currency (usually US
dollars or Euros). Conversion of the results of operations of Barans foreign
subsidiaries into Israeli currency for the purpose of inclusion in the
consolidated financial statements is made in accordance with principles
detailed in note 1 to Barans financial statements.

Baran invests part of its available funds in debentures repaid on
timetables that are generally similar to the timetables for discharge of most
of its current and long-term obligations. The interest rate earned from these
debentures typically is not lower than the interest rate charged from Baran in
connection with the discharge of such obligations. Barans long and short term
investments, usually, bear higher return than the interest charged for its long
term loans.

Baran and its consolidated subsidiaries have long term loans in three
main currencies: NIS, Euro and US$, as set forth in the table below. Each loan
is taken in the currency which reflects the geographical area in which Baran
and its subsidiaries operate. For example, loan taken, in order to finance
activities in Western Europe were taken in Euro. By operating in accordance to
this strategy (taking loans in the same currency as the currency used in the
activities at the geographical region), Baran tries to minimize its long term
exposure.

The table below sets forth the interest rates for long term loans and
long term bank loans, including current maturities:

|                               |  | Weighted
  average
  interest rates
  as of
  December 31, |             |                        |        
|------------------------------ |  | ---------------------------------------------------------- | ----------- | ---------------------- | -------
|                               |  |                                                            |             |                       
|                               |  |                                                            |             |                       
|                               |  |                                                            | December 31 |                       
|                               |  |                                                            |             |                       
|                               |  | 2003                                                       |             | 2002                   |        
|                               |  |                                                            |             |                        |        
|                               |  | %                                                          |             | Adjusted
  NIS         |        
|                               |  |                                                            |             |                        |        
|                               |  |                                                            |             | i n  t h o u s a n d s |        
|                               |  |                                                            |             |                        |        
|In dollars
  or linked thereto |  | *3                                                         |             |                        | 808    
|In Euros or
  linked thereto   |  | 6.21                                                       |             |                        | 6,302  
|Linked to
  the Israeli CPI    |  | 3.94                                                       |             |                        | 166,414
|Unlinked                       |  | 6.85                                                       |             |                        | 16,099 
|                               |  |                                                            |             |                        |        
|                               |  |                                                            |             |                        | 189,623
|                               |  |                                                            |             |                        |        

* interest is based on libor + 1%

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In the short term, due to frequent fluctuations in the exchange rates
of the NIS against the US$ or Euro, it is very difficult to avoid exposure. The
use of NIS loans, as set forth in the table above, result, in the short term,
in financing exposure and financing gaps, such as:

| |  | a loan,
  which was taken in NIS was converted to US$ and used for Baran Telecom day to
  day operations.                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                     
| |  | a loan taken
  in NIS was converted to Euro and US$, and used for investment in Europe and
  Canada.                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                     
| |  | evaluation
  or devaluation in exchange rates of the Euro or US$ or both against the NIS,
  will result in exposure, which will be reflected in the net financing item,
  as a direct and complete function, to the date of the balance, by the changes
  of the exchange rate multiplied by the amount of the loan.

Classified by currency, linkage terms and interest rates, the
short-term credit (excluding current maturities of long-term loans) is as
follows:

|                                      |  | Weighted
  interest rates
  at
  December 31, |             |                | 
|------------------------------------- |  | --------------------------------------------- | ----------- | -------------- | 
|                                      |  |                                               |             |               
|                                      |  |                                               | December 31 |               
|                                      |  |                                               |             |               
|                                      |  | 2003                                          |             | 2002           | 
|                                      |  |                                               |             |                | 
|                                      |  | %                                             |             | Adjusted
  NIS | 
|                                      |  |                                               |             |                | 
|                                      |  |                                               |             | in thousands   | 
|                                      |  |                                               |             |                | 
|                                      |  |                                               |             |                | 
|In, or
  linked to, foreigncurrencies |  | 2.593.43                                     |             | 58,232         | 
|Linked to
  the Israeli CPI           |  | 6.18                                          |             | 6,480          | 
|Unlinked                              |  | 6-7                                           |             | 8,539          | 
|                                      |  |                                               |             |                | 
|                                      |  |                                               |             | 73,251         | 
|                                      |  |                                               |             |                | 
|                                      |  |                                               |             |                | 

In the regular course of business, Baran is exposed to a variety of
market risks, which usually do not deviate from normal market risks in a
corporations activity. Baran is not dependent on a single supplier or
customer, due to the variety of activities, geographical spread, and the fields
in which it is engaged. Nevertheless, every year there is a number of customers
(changing from year to year) for whom Baran carries out especially large
projects. However this tendency is changing and Baran dependency on few
substantial customers decreased from 71% of its turnover in 2001 to 10% of its
turnover in 2003. Baran, as a service provider, is highly dependent on the
business of its customers. Fluctuation of demand for the products or services
provided by its customers has a significant influence on the scope of services
acquired by those customers from Baran.

87

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---

This dependency also affects the current cash flow of Baran, and in
difficult market conditions, as well as problematic credit terms and improper
payment morality, may result in negative cash flow from Barans current
activity.

The exposure to the depreciation of the real estate and in Barans
holdings value and the economic downturn and recession both in the Israeli and
in the global markets resulted in a general depreciation of real estate, as
well as depreciation of Barans holdings and their value. Baran and its
subsidiaries own real estate and also have investments and holdings, which
their value might be lower due to the general depreciation, as explained above.
Whenever the need arises Baran performs a valuation of its holdings and real
estate in the acceptable manners (cash flow, external valuations, valuation of
publicly traded companies). Notwithstanding, the value of investments, holdings
and real estate will be monitored and valuated at various reporting intervals,
in order to present the real value of those items, such as the re-evaluation of
Baran Telecoms goodwill, which resulted in a write down of $8.3 million.

The exposure to market risks is handled on a current basis and is
frequently discussed on meetings of Barans managing directors, and is reported
to the Board at least twice every quarter. Barans internal auditor carries out
from time to time, and according to guidelines of the Board (through its audit
committee), inspections pertaining to Barans market risks, relating to both financial
and current trading factors.

Barans and more than half of its subsidiaries, most used currency is
the Israeli currency. Accordingly, Baran attempts to protect itself against any
exposure arising from the difference between assets and liabilities in each
currency other than the Israeli currency. Baran strives to limit its exposure
to exchange rate fluctuations by attempting to maintain similar levels of
assets and liabilities in any given currency, to the extent possible, and does
not enter into derivative transactions to hedge its exchange rate risk.
However, this method of natural hedging is not always achievable.

88

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The table below sets forth the monetary assets and liabilities of Baran
during 2003:

|                                                                            |  | D e c e m b e r  3
  1,  2 0 0 3 | 
|--------------------------------------------------------------------------- |  | -------------------------------- | 
|                                                                            |  |                                  | 
|                                                                            |  | Linkage
  to Euro                | 
|                                                                            |  |                                  | 
|                                                                            |  | Adjusted
  NIS in thousands      | 
|                                                                            |  |                                  | 
|Adjusted NIS :                                                              |  |                                  | 
|Assets:                                                                     |  |                                  | 
|Current
  assets                                                            |  | 72,925                           | 
|Long
  term loan and long-term
            receivables                      |  |                                  | 
|                                                                            |  |                                  | 
|                                                                            |  | 72,925                           | 
|                                                                            |  |                                  | 
|Liabilities:                                                                |  |                                  | 
|Curent liabilities                                                          |  | 78,530                           | 
|Long
  term bank loans
            (including
  current maturities)         |  | 7,016                            | 
|Other
  long term liabilities                                               |  |                                  | 
|Capital
  notes issued to minority
            shareholders of a subsidiary |  |                                  | 
|                                                                            |  |                                  | 
|                                                                            |  |                                  | 
|                                                                            |  | 85,546                           | 
|                                                                            |  |                                  | 

It is clear from the table above that Barans current assets and
current liabilities in each of the most used currencies, hence $US and Euro,
are correlated; so that sharp foreign exchange fluctuations will not materially
expose Baran. By correlating between each currency and assets and liabilities,
the Company aims to obtain a natural hedging process to minimize the risks
related to fluctuations in foreign exchange rates.

In the recent years, inflation fluctuation in Israel was very
unpredictable. In 2003 the inflation rate in Israel was (1.9)% as compared to
6.5% inflation rate in 2002. This situation directly influences Baran, and
creates difficulties in hedging and planning inflationary risks. Therefore at
any given time Baran holds both CPI linked and non-CPI linked assets and
liabilities.

Deduction of current NIS CPI linked liabilities from NIS CPI linked
assets results in an exposure in the sum of NIS104.6 million, on the other
hand, deduction of current NIS non-CPI linked liabilities from NIS non-CPI
linked assets results in a surplus in the sum of NIS 37.5 million.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES

Not Applicable

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND
DELINQUENCIES

None.

89

---

---

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS
OF SECURITY HOLDERS AND USE OF RECORDS

None.

ITEM 15. CONTROL AND PROCEDURES

As required by Rule 13a-15 under the United States Exchange Act Baran
carried out an evaluation of the effectiveness of the design and operation of
its disclosure controls and procedures as of March 15th, 2004, being
the date of Barans most recently completed fiscal year. This evaluation was
carried out under the supervision and with participation of Barans Chief
Executive Officer, Meir Dor, and Chief Financial Officer, Sasson Shilo and
concluded that Barans disclosure control and procedures are effective in
timely alerting management to material information relating to Baran required
to be included in its periodic filings with the SEC.

Disclosure controls and procedures are controls and other procedures
designed to ensure that information required to be disclosed in Barans reports
filed or submitted under the Exchange Act is recorded, processed, summarized,
and reported, within the time periods specified in the SECs rules and
regulations. Disclosure control and procedure include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in Barans reports filed under the Exchange Act is accumulated and
communicated to management, including Barans Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required disclosure.

There were no changes in Barans internal control over financial
reporting that occurred during the year ended December 31, 2003 that have
materially affected, or are reasonably likely to materially affect, Barans
internal control over financial reporting.

The term internal control over financial reporting is defined as a
process designed by, or under the supervision of, the registrants principal
executive and principal financial officers, or persons performing similar
functions and effected by the registrants board of directors, management and
other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:

| | (1) | pertain to
  the maintenance of records that in reasonable detail accurately and fairly
  reflect the transaction and disposition of the assets of Baran;                                                                                                                                                                                    
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | provide
  reasonable assurance that transactions are recorded as necessary to permit
  preparation of financial statements in accordance with generally accepted
  accounting principles, and that receipts and expenditures of Baran are being
  made only in accordance with authorization of management and directors of the
  registrant;

90

---

---

| | (3) | provide
  reasonable assurance regarding prevention or timely detection of unauthorized
  acquisition, use or disposition of the registrants assets that could have
  material effect on the financial statements.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

The Board of Directors has determined that Ms. Tami Gottlib is an
audit committee financial expert as defined in Item 16A of Form 20-F. Ms.
Tami Gottlib and each of the other members of the Audit Committee is an
independent director as defined in the Exchange Act and the rules and
regulations promulgated hereunder.

ITEM 16B. CODE OF ETHICS

Baran adopted a Code of ethics in order to codify those standards that
Baran believes are reasonably designed to deter wrong-doing and to promote,
among other things, adherence to honest and ethical conduct, full, fair,
accurate, timely and understandable disclosure, compliance with applicable
governmental laws, and accountability for adherence to the Code of Ethics.
Baran undertakes to provide a copy of the Code of Ethics to any person without
charge upon request.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND
SERVICES

Kesselman & Kesselman (PricewaterhouseCoppers Israel) has served as
Barans independent public accountant for each of the fiscal years in the three
years period ended December 31, 2003, for which audited financial statements
appear in the annual report on Form 20-F. The auditor is elected annually at
the Annual General Meeting.

The following table presents the aggregate fees for professional
services and other services rendered by that PricewaterhouseCoppers Israel to
Baran in 2002 and 2003.

|                    |  | 2003 |         | 2002 |  
|------------------- |  | ---- | ------- | ---- | -
|                    |  |      |         |      |  
|Audit
  Fees(1)     |  | $    | 156,923 |      | $
|Tax Fees(2)         |  | $    | 13,077  |      | $
|All Other
  Fees(3) |  | $    | 19,916  |      | $
|Total               |  | $    | 189,916 |      | $

(1) Audit fees consist of fees billed for the consolidated balance
sheet of Baran Group Ltd. and related consolidated statements of income,
changes in shareholders equity and cash flow. They also include fees billed
for other audit services, which are those services that only the external
auditor reasonably can provide, and include the provision of comfort letters
and consents, attestation service relating to audit. Additionally, the fee
includes assurance and related services that are reasonably related to the
performance of the audit of Barans financial statements or that are
traditionally performed by the external auditor and include consultations
concerning financial accounting and reporting standards.

91

---

---

(2) Tax fees include fees billed for tax compliance services, including
tax consultations, tax advice related to mergers and acquisitions.

(3) All other fees include fees billed for due diligences relate to
planned acquisitions, financial model and consulting services related to
reorganization of Baran.

Audit Committee
Pre-approval Policies and Procedures

The Audit Committee of Barans Board of Directors is responsible, among
other things, for the oversight of the external auditor. The Audit Committee
has adopted a policy regarding the pre-approval of audit and permissible
non-audit services provided by the independent auditors.

The substance of the Audit Committee charter is as follows:

| |  | The Audit
  Committee is a committee of the Board of Directors.                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | The
  Committee assist the Board in fulfilling its oversight responsibility to the
  shareholders and others by reviewing (1) the Companys financial statements
  and the financial reporting process, (2) the systems of internal accounting
  and financial controls, (3) the internal audit function, (4) the annual
  independent audit of the Companys financial statements, and (5) business
  irregularities and compliance with laws and regulations.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | It is the
  responsibility of the Committee to maintain free and open communication
  between the Committee, the independent public accountant, the internal
  auditor and management of the Company.                                                                                                                                                                                                                                                          

To fulfill its responsibilities, the Committee shall:

Internal Accounting and Financial Controls:

| |  | Review with
  management, the internal auditor and the independent public accountant, the
  adequacy of internal accounting and financial controls.  This review shall include inquiry about
  significant risks and exposures, and assessment of the effectiveness of
  management plans to minimize such risks.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                  
| |  | Evaluate
  whether management is effectively communicating and ensure employee
  understanding of the importance of effective internal
  accounting and financial control procedures.                                                                                                                            

92

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| |  | Determine
  whether internal accounting and financial control improvement recommendations
  made by the internal auditor and the independent public accountant have been
  appropriately implemented in a timely manner by management.                                                                                                                                                                                                                                                                                                                                  
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   | Financial Reporting:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Review and
  discuss with management and the independent public accountant the accounting
  policies which may be viewed as critical to the Company, and review and
  discuss significant accounting and reporting issues, including financial
  reporting proposals and understand their impact on the Companys financial
  statements.                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Review the
  Companys annual financial statements and managements discussion and
  analysis with management, the internal auditor, and the independent public
  accountant and determine whether the financial statements (a) are complete
  and consistent with the information known to Committee members, and (b)
  reflect appropriate accounting principles.                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Discuss with
  the independent public accountant, matters relating to the conduct of the
  audit as required by professional auditing standards.                                                                                                                                                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Review with
  the Companys general counsel legal matters that could have a significant
  impact on the financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Review with management and the independent public accountant financial
  statements, including the results of the independent public accountants
  review of the financial statements, several times during the year.                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   | Business Irregularities and Legal Compliance:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Identify
  irregularities in the management of the Companys affairs through interviews
  and in consultation with the Companys management, the internal auditor and
  the independent public accountant. In the event that the Committee identifies
  any irregularities, it will suggest to the Board of Directors remedial
  courses of action. The Committee shall be fully entitled to rely on such
  interviews and consultations, including reports by such parties and shall be
  under no obligation to conduct any independent investigation or verification.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   | Independent Public Accountant:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Review, in
  advance of the commencement of the audit, the proposed audit scope and fees
  to be paid to the independent public accountant pursuant to the decision of
  the Board or the general meeting.                                                                                                                                                                                                                                                                                                                                                              

93

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| |  | Review the
  experience and qualifications of the senior members of the independent public
  accountants team and the quality control procedures of the independent
  public accountant.                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Recommend to
  the Board, which shall recommend to the general meeting of the Companys shareholders,
  the appointment of the independent public accountant.                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Receive
  periodic written statements from the independent public accountant
  delineating all relationships between the independent public accountant and
  the Company, discuss with the independent public accountant any disclosed
  relationships or services that may impact the objectivity and independence of
  the independent public accountant, and recommend any appropriate actions to
  be taken.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Approve, in
  advance, any Board resolution regarding the engagement of the independent
  public accountant to provide non-audit services and the fee for such
  services.                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Ensure that
  the lead audit partner and review partner on the Companys account at the
  independent public accountant are changed not less frequently than once every
  five fiscal years.                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   | Internal Audit:                                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Review the
  Companys internal audit function including the independence and authority of
  its reporting obligations, its effectiveness, proposed control review plans and
  resources for the coming year, and the coordination of such plans with the
  independent public accountant.                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Review and
  concur in the appointment, replacement, reassignment or dismissal of the
  internal auditor.                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   | Other Responsibilities:                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Review and
  update this Charter annually, and receive approval of changes from the Board.                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Provide the
  independent public accountant, internal auditor and management with
  appropriate opportunities to meet privately with the Committee.                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Review and
  approve related party transactions with office holders and controlling
  shareholders as required by applicable law or as referred by the Board.                                                                                                                                                                                                                                                   

94

---

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| |  | Conduct or
  authorize investigations into any matters within the Committees scope of
  responsibilities.  The Committee shall
  be empowered to retain independent counsel and other professionals to assist
  in the conduct of any investigations or to advise the Committee on other
  matters, the fees of which shall be paid by the Company.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                     
| |  | Prepare a
  letter for inclusion in the Companys annual report that describes the
  Committees composition and responsibilities, and how they are discharged.                                                                                                                                                                                     

In meeting its responsibilities, the Committees policies and
procedures shall be flexible so that it may react to changing circumstances or
conditions.

ITEM 16D. EXEMPTIONS FROM THE LISTING
STANDARDS FOR AUDIT COMMITTEES

Not Applicable

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY
THE ISSUER AND AFFILIATED PURCHASERS

During 2003 neither Baran nor its affiliates have purchased Barans
shares.

The following table sets forth the shares held by Baran and its
subsidiary as of December 31, 2003:

|                                                            |  | 2003    | 
|----------------------------------------------------------- |  | ------- | 
|                                                            |  |         | 
|Baran Group
  Ltd.                                          |  | 179,736 | 
|Baran
  Industries (91) Ltd.                                |  | 43,209  | 
|Baran
  projects Construction Ltd.                          |  | 3,925   | 
|Baran
  Technology Products
  Management and Marketing Ltd. |  | 129,473 | 

PART III

ITEM 17. Not Applicable

ITEM 18. FINANCIAL STATEMENTS

95

---

---



BARAN GROUP LTD.

(An Israeli Corporation)

---

---

BARAN GROUP LTD.

(An Israeli Corporation)

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                                                    | Page      
|--------------------------------------------------------------------------------------------------------------------------------------------------- | ----------
|                                                                                                                                                    |           
|                                                                                                                                                    |           
|Report of
  independent auditors                                                                                                                    | F-3-F-4   
|                                                                                                                                                    |           
|Consolidated
  balance sheets at December 31, 2002 and 2003                                                                                         | F-5-F-6   
|                                                                                                                                                    |           
|Consolidated
  statements of income (loss) for the years endedDecember 31, 2001, 2002 and
  2003                                                    | F-7       
|                                                                                                                                                    |           
|Consolidated
  statements of changes in shareholders equity for the years endedDecember
  31, 2001, 2002 and 2003                                  | F-8       
|                                                                                                                                                    |           
|Consolidated
  statements of cash flows for the years endedDecember 31, 2001, 2002 and 2003                                                         | F-9-F-12  
|                                                                                                                                                    |           
|Notes to
  consolidated financial statements                                                                                                        | F-13-F-100
|                                                                                                                                                    |           
|Appendix I
  - Details of subsidiaries, proportionately consolidated companies,proportionately consolidated joint ventures and associated companies | F-101     
|Appendix II
  - Valuation and qualifying accounts                                                                                                   | F-102     
|                                                                                                                                                    |           
|Reports of
  independent auditors with respect to subsidiaries, associated company andproportionately consolidated companies and joint ventures     | F-103-F115

(In adjusted New Israeli Shekels (NIS).  Year ended December 31, 2003 - with
convenience translation into U.S. dollars (note 1b(4)).

F-2

---

---

| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | Kesselman & Kesselman
       Certified Public Accountants (Isr)
       6 Yaski Street     Beer Sheva 84222 Israel
       Telephone +972-8-6277020
       Facsimile +972-8-6276351

REPORT OF INDEPENDENT
AUDITORS

To
the shareholders ofBARAN GROUP LTD.

We
have audited the consolidated balance sheets of Baran Group Ltd. (hereafter -the Company) as of December 31, 2002 and
2003 and the related consolidated statements of income (loss), changes in
shareholders equity and cash flows for each of the three years in the period
ended December 31, 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
did not audit the financial statements of certain subsidiaries and
proportionately consolidated companies and joint ventures, whose assets
included in consolidation constitute approximately 1% and 3.5% of total
consolidated assets as of  December 31,
2002 and 2003, respectively, and whose revenues included in consolidation
constitute approximately 24.8%, 4.1% and 8.1% of total consolidated revenues
for the years ended December 31, 2001, 2002 and 2003, respectively. We did
not audit the financial statements of associated companies,
the Companys investment in which, as reflected in the balance sheets as of
December 31, 2002 and 2003, is adjusted NIS 26,818,000 and adjusted
NIS 24,181,000,respectively, and the Companys share in the
profits (losses) of which aggregates adjusted NIS 127,000, adjusted
NIS 1,040,000 and adjusted NIS (617,000), in the years ended
December 31, 2001, 2002 and 2003, respectively. The financial statements
of the above subsidiaries, proportionately consolidated companies,
proportionately consolidated joint ventures and associated companies were
audited by other independent auditors, whose reports have been furnished to us,
and our opinion, insofar as it relates to amounts included for those companies,
is based on the reports of the other independent auditors.

We
conducted our audits in accordance with auditing standards generally accepted
in Israel and in accordance with 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 and the reports of the other
independent auditors provide a reasonable basis for our opinion.

In
our opinion, based on our audits and the reports of the other independent
auditors referred to above, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company as of December 31, 2002 and 2003 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, 2003, in conformity
with accounting principles generally accepted in Israel.

F-3

---

---

Accounting
principles generally accepted in Israel vary in certain significant respects
from accounting principles generally accepted in the United States of America
and as allowed by Item 18 to Form 20-F. The application of the latter would
have affected the determination of consolidated net income (loss) for each of
the three years in the period ended December 31, 2003 and the
determination of consolidated shareholders equity at December 31, 2002
and 2003 to the extent summarized in note 20 to the consolidated financial
statements.

As
explained in note 1b, the consolidated financial statements referred to
above are presented in values adjusted for the changes in the general
purchasing power of Israeli currency, in accordance with pronouncements of the
Institute of Certified Public Accountants in Israel.

As
discussed in note 1e to the consolidated financial statements, effective
July 1, 2003, the Company changed its method of accounting for investment
in associated companies to conform with clarification No. 1 of Israel
Accounting Standard No. 15, Impairment of Assets.

|Beer Sheva, Israel | Kesselman & Kesselman                
|------------------ | -------------------------------------
|May
  21, 2004     | Certified Public
  Accountants (Isr.)

F-4

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
CONSOLIDATED BALANCE SHEETS

|                                                                                             |  | December 31                                |        
|-------------------------------------------------------------------------------------------- |  | ------------------------------------------ | -------
|                                                                                             |  |                                            |        
|                                                                                             |  | 2002                                       |        
|                                                                                             |  |                                            |        
|                                                                                             |  | Adjusted new
  Israeli shekels
  (note 1b) |        
|                                                                                             |  |                                            |        
|                                                                                             |  | In thousands                               |        
|                                                                                             |  |                                            |        
|                                                                                             |  |                                            |        
|A 
  s  s  e  t  s(note 19)                                                                  |  |                                            |        
|                                                                                             |  |                                            |        
|CURRENT ASSETS(note 14):                                                                     |  |                                            |        
|Cash
  and cash equivalents (note 1p)                                                        |  |                                            | 90,273 
|Short-term
  investments (note 15a)                                                          |  |                                            | 86,228 
|Restricted
  cash (note 19)                                                                  |  |                                            | 1,394  
|Accounts
  receivable (note 15b):                                                            |  |                                            |        
|Trade
  and income receivable                                                                |  |                                            | 257,060
|Other                                                                                        |  |                                            | 46,594 
|Inventories
  (note 15c)                                                                     |  |                                            | 9,185  
|                                                                                             |  |                                            |        
|T o t a
  l  current assets                                                                  |  |                                            | 490,734
|                                                                                             |  |                                            |        
|INVESTMENTS, LOANS AND LONG-TERM
       RECEIVABLES:                                         |  |                                            |        
|Investments
  in associated companies (note 3)                                               |  |                                            | 26,818 
|Other investments, loans and a long-term receivable (note 4)                                 |  |                                            | 27,862 
|Deferred
  income taxes (note 13b)                                                           |  |                                            | 1,559  
|                                                                                             |  |                                            |        
|                                                                                             |  |                                            | 56,239 
|                                                                                             |  |                                            |        
|LAND AND BUILDINGS FOR LEASE,net of accumulated
       deprecation and amortization (note 5) |  |                                            | 61,718 
|                                                                                             |  |                                            |        
|FIXED ASSETS,net of accumulated deprecation
  and
       amortization (note 6)               |  |                                            | 72,192 
|                                                                                             |  |                                            |        
|GOODWILL, net of accumulated amortization
  (note 7)                                         |  |                                            | 97,258 
|                                                                                             |  |                                            |        
|OTHER INTANGIBLE ASSETS, net of accumulated
       amortization (note 7)                     |  |                                            | 6,002  
|                                                                                             |  |                                            |        
|                                                                                             |  |                                            | 784,143
|                                                                                             |  |                                            |        

Date of approval of the
financial statements May 21, 2004.

|                      |  |                  
|--------------------- |  | -----------------
|                      |  |                  
|Meir Dor              |  | Sasson Shilo     
|Chairman of the Board |  | Secretary and CFO
|Of Directors and CEO  |  |                  

F-5

---

---

|                                                                                                                                                                                                                                            |  | December 31                              |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | -------
|                                                                                                                                                                                                                                            |  |                                          |        
|                                                                                                                                                                                                                                            |  | 2002                                     |        
|                                                                                                                                                                                                                                            |  |                                          |        
|                                                                                                                                                                                                                                            |  | Adjusted new Israeli
  shekels (note 1b) |        
|                                                                                                                                                                                                                                            |  |                                          |        
|                                                                                                                                                                                                                                            |  | In thousands                             |        
|                                                                                                                                                                                                                                            |  |                                          |        
|                                                                                                                                                                                                                                            |  |                                          |        
|Liabilities and shareholders equity(note
  19)                                                                                                                                                                                             |  |                                          |        
|                                                                                                                                                                                                                                            |  |                                          |        
|CURRENT LIABILITIES(note 14):                                                                                                                                                                                                               |  |                                          |        
|Short-term
  bank credit and bank loans (note 15d)                                                                                                                                                                                          |  |                                          | 99,143 
|Accounts
  payable and accruals (note 15e):                                                                                                                                                                                                 |  |                                          |        
|Trade                                                                                                                                                                                                                                       |  |                                          | 97,136 
|Other                                                                                                                                                                                                                                       |  |                                          | 155,677
|                                                                                                                                                                                                                                            |  |                                          |        
|T
  o t a l current liabilities                                                                                                                                                                                                             |  |                                          | 351,956
|                                                                                                                                                                                                                                            |  |                                          |        
|LONG-TERM LIABILITIES(note 14):                                                                                                                                                                                                             |  |                                          |        
|Liability
  for employee rights upon retirement,
            net of amount
  funded (note 10)                                                                                                                                               |  |                                          | 5,732  
|Bank
  loans, net of current maturities (notes 8 and 19)                                                                                                                                                                                    |  |                                          | 163,731
|Capital
  notes issued to minority shareholders in a
            subsidiary, net
  (note 9)                                                                                                                                                 |  |                                          | 10,948 
|Deferred
  income taxes (note 13b)                                                                                                                                                                                                          |  |                                          | 50     
|                                                                                                                                                                                                                                            |  |                                          |        
|T
  o t a l long-term liabilities                                                                                                                                                                                                           |  |                                          | 180,461
|                                                                                                                                                                                                                                            |  |                                          |        
|COMMITMENTS AND CONTINGENT
       LIABILITIES(note 11)                                                                                                                                                                                      |  |                                          |        
|                                                                                                                                                                                                                                            |  |                                          |        
|T
  o t a l liabilities                                                                                                                                                                                                                     |  |                                          | 532,417
|MINORITY INTERESTS                                                                                                                                                                                                                          |  |                                          | 8,957  
|                                                                                                                                                                                                                                            |  |                                          |        
|SHAREHOLDERS EQUITY (note 12):                                                                                                                                                                                                             |  |                                          |        
|Share
  capital - ordinary shares of adjusted NIS 1 par value
            (authorized:
  December 31, 2002 and 2003 - 20,000,000
            shares; issued
  and outstanding: December 31, 2002 and
            2003 - 8,375,884
  shares) |  |                                          | 14,951 
|Capital
  surplus                                                                                                                                                                                                                           |  |                                          | 70,835 
|Differences
  from translation of foreign currency financial
            statements of
  subsidiaries and a proportionately consolidated
            company                                                                                |  |                                          | (141   
|Retained
  earnings                                                                                                                                                                                                                         |  |                                          | 162,773
|Cost
  of Company shares held by the Company and its
            subsidiaries
  (December 31, 2002 and 2003 - 232,416 shares
            and 356,344
  shares, respectively)                                                                |  |                                          | (5,649 
|                                                                                                                                                                                                                                            |  |                                          |        
|T
  o t a l  shareholders equity                                                                                                                                                                                                           |  |                                          | 242,769
|                                                                                                                                                                                                                                            |  |                                          |        
|T
  o t a l  liabilities and shareholders
  equity                                                                                                                                                                                         |  |                                          | 784,143
|                                                                                                                                                                                                                                            |  |                                          |        

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

F-6

---

---

BARAN GROUP
LTD.(An Israeli Corporation)CONSOLIDATED STATEMENTS OF INCOME (LOSS)

|                                                                                                                                                                |  | Year ended December 31                    |          
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------- | ---------
|                                                                                                                                                                |  |                                           |          
|                                                                                                                                                                |  | 2001                                      |          
|                                                                                                                                                                |  |                                           |          
|                                                                                                                                                                |  | Adjusted new Israeli shekels 
  (note 1b) |          
|                                                                                                                                                                |  |                                           |          
|                                                                                                                                                                |  | In thousands (except per share data)      |          
|                                                                                                                                                                |  |                                           |          
|                                                                                                                                                                |  |                                           |          
|                                                                                                                                                                |  |                                           |          
|                                                                                                                                                                |  |                                           |          
|REVENUES(note 18):                                                                                                                                              |  |                                           |          
|Construction
  projects and services                                                                                                                            |  |                                           | 911,549  
|Sale
  of products                                                                                                                                              |  |                                           | 90,830   
|Lease
  of buildings                                                                                                                                            |  |                                           | 6,284    
|Management
  fees from proportionately consolidated
            companies,
  proportionately consolidated joint ventures
            and associated
  companies |  |                                           | 2,303    
|                                                                                                                                                                |  |                                           |          
|T
  o t a l revenues                                                                                                                                            |  |                                           | 1,010,966
|                                                                                                                                                                |  |                                           |          
|COST OF REVENUES(note 15f):                                                                                                                                     |  |                                           |          
|Construction
  projects and services                                                                                                                            |  |                                           | 741,532  
|Sale
  of products                                                                                                                                              |  |                                           | 89,440   
|Lease
  of buildings                                                                                                                                            |  |                                           | 1,560    
|                                                                                                                                                                |  |                                           |          
|T
  o t a l cost of revenues                                                                                                                                    |  |                                           | 832,532  
|                                                                                                                                                                |  |                                           |          
|GROSS PROFIT                                                                                                                                                    |  |                                           | 178,434  
|RESEARCH AND DEVELOPMENT EXPENSES                                                                                                                               |  |                                           | 3,663    
|SELLING, MARKETING, GENERAL AND
       ADMINISTRATIVE EXPENSES,
  net:                                                                                          |  |                                           |          
|Selling
  and marketing, net (note 15g)                                                                                                                         |  |                                           | 9,484    
|General
  and administrative (note 15h)                                                                                                                         |  |                                           | 59,062   
|                                                                                                                                                                |  |                                           |          
|OPERATING INCOME (LOSS)                                                                                                                                         |  |                                           | 106,225  
|FINANCIAL INCOME (EXPENSES),net (note 15i)                                                                                                                      |  |                                           | 7,816    
|OTHER INCOME (EXPENSES),net:                                                                                                                                    |  |                                           |          
|Goodwill
  impairment                                                                                                                                           |  |                                           |          
|Other
  (note 15j)                                                                                                                                              |  |                                           | 412      
|                                                                                                                                                                |  |                                           |          
|INCOME (LOSS) BEFORE TAXES ON INCOME                                                                                                                            |  |                                           | 114,453  
|TAXES ON INCOME(note 13)                                                                                                                                        |  |                                           | 44,496   
|                                                                                                                                                                |  |                                           |          
|INCOME (LOSS) AFTER TAXES ON INCOME                                                                                                                             |  |                                           | 69,957   
|                                                                                                                                                                |  |                                           |          
|SHARE IN PROFITS (LOSSES) OF ASSOCIATED
       COMPANIES,net (note
  15k)                                                                                       |  |                                           | (3,174   
|                                                                                                                                                                |  |                                           |          
|MINORITY INTERESTS IN LOSSES OF
       SUBSIDIARIES, net                                                                                                        |  |                                           | 574      
|                                                                                                                                                                |  |                                           |          
|NET INCOME (LOSS)                                                                                                                                               |  |                                           | 67,357   
|                                                                                                                                                                |  |                                           |          
|EARNINGS (LOSS) PER SHARE -basic and
  diluted                                                                                                                  |  |                                           | 8.91     
|                                                                                                                                                                |  |                                           |          
|WEIGHTED AVERAGE NUMBER OF SHARES
       OUTSTANDINGbasic and
  diluted-in thousands (note 1q)                                                                 |  |                                           | 7,565    
|                                                                                                                                                                |  |                                           |          

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

F-7

---

---

BARAN GROUP LTD.(An Israeli
Corporation)CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

|                                                                                                                                                                               |  | Share capital |           | Capital
  surplus |                | Differences
  from
  translation
  of foreign
  currency
  financial
  statements of
  subsidiaries |  | Retained
  earnings |        | Cost of
  Company
  shares
  held by the
  Company
  and its
  subsidiaries |  | Total |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | --------- | ----------------- | -------------- | --------------------------------------------------------------------------------------------------- |  | ------------------- | ------ | --------------------------------------------------------------------------- |  | ----- | -
|                                                                                                                                                                              
|Number
  of shares                                                                                                                                                             |  | Amount       
|                                                                                                                                                                               |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|                                                                                                                                                                               |  |               |           |                   | In
  thousands |                                                                                                    
|                                                                                                                                                                               |  |               |           |                   |                |                                                                                                    
|Adjusted
  new Israeli shekels (note 1b):                                                                                                                                      |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|                                                                                                                                                                               |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|BALANCE AT
  JANUARY 1, 2001                                                                                                                                                   |  |               | 7,736,468 |                   |                | 14,312                                                                                              |  |                     | 54,056 |                                                                             |  |       |  
|                                                                                                                                                                               |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|CHANGES
  DURING THE YEAR
       ENDED DECEMBER 31, 2001:                                                                                                                      |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|Net
  income                                                                                                                                                                   |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|Issuance
  of restricted shares                                                                                                                                                |  |               | 185,250   |                   |                | 195                                                                                                 |  |                     |        |                                                                             |  |       |  
|Differences
  from translation of foreign
            currency
  financial statements
            of subsidiaries                                                              |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  | (57   | )
|Dividends
  (adjusted NIS 4.2 per share)                                                                                                                                       |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|                                                                                                                                                                               |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|BALANCE AT
  DECEMBER 31, 2001                                                                                                                                                 |  |               | 7,921,718 |                   |                | 14,507                                                                                              |  |                     | 54,056 |                                                                             |  | (57   | )
|CHANGES
  DURING THE YEAR
       ENDED DECEMBER 31, 2002:                                                                                                                      |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|Net
  income                                                                                                                                                                   |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|Issuance
  of shares within framework of
            acquisition of
  subsidiary
            (see note 2b)                                                                     |  |               | 454,166   |                   |                | 444                                                                                                 |  |                     | 16,779 |                                                                             |  |       |  
|Differences
  from translation of foreign
            currency
  financial statements
            of subsidiaries                                                              |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  | (84   | )
|Dividends
  (adjusted NIS 1.7 per share)                                                                                                                                       |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|Cost
  of acquisition of Company shares
            by a subsidiary
  (67,526 shares)                                                                                          |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|                                                                                                                                                                               |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|BALANCE AT
  DECEMBER 31, 2002                                                                                                                                                 |  |               | 8,375,884 |                   |                | 14,951                                                                                              |  |                     | 70,835 |                                                                             |  | (141  | )
|CHANGES
  DURING THE YEAR
       ENDED DECEMBER 31, 2003:                                                                                                                      |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|Loss                                                                                                                                                                           |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|Differences
  from translation of a foreign
            currency
  financial statements
            of subsidiaries
  and a proportionately
            consolidated
  company |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  | 377   |  
|                                                                                                                                                                               |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|BALANCE AT
  DECEMBER 31, 2003                                                                                                                                                 |  |               | 8,375,884 |                   |                | 14,951                                                                                              |  |                     | 70,835 |                                                                             |  | 236   |  
|                                                                                                                                                                               |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|Convenience
  translation into U.S. dollars
       (note 1b(4)):                                                                                                               |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|                                                                                                                                                                               |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|BALANCE AT
  JANUARY 1, 2003                                                                                                                                                   |  |               | 8,375,884 |                   |                | 3,414                                                                                               |  |                     | 16,176 |                                                                             |  | (32   | )
|                                                                                                                                                                               |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|                                                                                                                                                                               |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|CHANGES
  DURING THE YEAR
       ENDED DECEMBER 31, 2003:                                                                                                                      |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|Loss                                                                                                                                                                           |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|Differences
  from translation of foreign
            currency financial
  statements
            of subsidiaries                                                              |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  | 86    |  
|                                                                                                                                                                               |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  
|BALANCE AT
  DECEMBER 31, 2003                                                                                                                                                 |  |               | 8,375,884 |                   |                | 3,414                                                                                               |  |                     | 16,176 |                                                                             |  | 54    |  
|                                                                                                                                                                               |  |               |           |                   |                |                                                                                                     |  |                     |        |                                                                             |  |       |  

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

F-8

---

---

(Continued) - 1

BARAN GROUP LTD.(An Israeli
Corporation)CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                                                                                                                 |  | Year ended December 31                    |       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------- | ------
|                                                                                                                                                                                                 |  |                                           |       
|                                                                                                                                                                                                 |  | 2001                                      |       
|                                                                                                                                                                                                 |  |                                           |       
|                                                                                                                                                                                                 |  | Adjusted new Israeli shekels 
  (note 1b) |       
|                                                                                                                                                                                                 |  |                                           |       
|                                                                                                                                                                                                 |  | I n    t h o u s a n d s                  |       
|                                                                                                                                                                                                 |  |                                           |       
|                                                                                                                                                                                                 |  |                                           |       
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                                                                                            |  |                                           |       
|Net
  income (loss)                                                                                                                                                                              |  |                                           | 67,357
|                                                                                                                                                                                                 |  |                                           |       
|Adjustments
  to reconcile net income (loss) to net cash
        provided by (used in) operating
  activities:                                                                                   |  |                                           |       
|Income
  and expenses not involving cash flows:                                                                                                                                                  |  |                                           |       
|Minority
  interests in losses of subsidiaries, net                                                                                                                                              |  |                                           | (574  
|Share
  in profits (losses) of associated companies,
              net
  of a dividend received therefrom                                                                                        |  |                                           | 313   
|Depreciation
  and amortization                                                                                                                                                                  |  |                                           | 10,899
|Goodwill
  impairment                                                                                                                                                                            |  |                                           |       
|Deferred
  income taxes, net                                                                                                                                                                     |  |                                           | 2,595 
|Capital
  loss (gain):                                                                                                                                                                           |  |                                           |       
|On
  sale of fixed assets                                                                                                                                                                        |  |                                           | (78   
|On
  disposal of shares of associated company                                                                                                                                                    |  |                                           |       
|On
  sale of investment designated for sale                                                                                                                                                      |  |                                           |       
|In
  respect of a provision for anticipated
                 loss
  due to a possible conversion of
                 convertible
  securities issued by an
                 associated
  company |  |                                           | (53   
|Impairment
  of fixed assets                                                                                                                                                                     |  |                                           |       
|In
  respect of impairment in value of
                 investment
  in an associated company                                                                                                    |  |                                           | 4,359 
|In
  respect of impairment in value of
                 other
  investments                                                                                                                      |  |                                           |       
|Increase
  (decrease) in liability for employee rights
              upon
  retirement, net                                                                                                      |  |                                           | 1,159 
|Exchange
  and linkage differences on principal
              of
  long-term loans                                                                                                               |  |                                           | 814   
|Exchange
  differences on long-term bank deposit
              and
  erosion of long-term loans granted, net                                                                                     |  |                                           | (623  
|Decrease (increase) in value of short-term marketable
              securities,
  net                                                                                                            |  |                                           | (134  
|Income
  received in non-marketable options                                                                                                                                                      |  |                                           |       
|                                                                                                                                                                                                 |  |                                           |       
|                                                                                                                                                                                                 |  |                                           | 18,677
|                                                                                                                                                                                                 |  |                                           |       

F-9

---

---

(Continued)  2

BARAN GROUP LTD.

(An Israeli Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                               |  | Year ended December 31                    |        
|-------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------- | -------
|                                                                                                               |  |                                           |        
|                                                                                                               |  | 2001                                      |        
|                                                                                                               |  |                                           |        
|                                                                                                               |  | Adjusted new Israeli shekels 
  (note 1b) |        
|                                                                                                               |  |                                           |        
|                                                                                                               |  | I n   t h o u s a n d s                   |        
|                                                                                                               |  |                                           |        
|                                                                                                               |  |                                           |        
|Brought forward                                                                                                |  |                                           | 18,677 
|Changes
  in operating asset and liability items:                                                              |  |                                           |        
|Decrease
  (increase) in accounts receivable:                                                                  |  |                                           |        
|Trade
  receivables and income receivable                                                                      |  |                                           | (29,619
|Other                                                                                                          |  |                                           | 14,149 
|Increase (decrease) in accounts payable and accruals:                                                          |  |                                           |        
|Trade                                                                                                          |  |                                           | 97,288 
|Other                                                                                                          |  |                                           | (13,759
|Increase
  (decrease) in customer advances, net of
                 inventory
  in respect of work in progress |  |                                           | (8,137 
|Decrease
  (increase) in inventories                                                                           |  |                                           | 6,689  
|Decrease
  in long-term receivables                                                                            |  |                                           |        
|                                                                                                               |  |                                           |        
|                                                                                                               |  |                                           | 66,611 
|                                                                                                               |  |                                           |        
|                                                                                                               |  |                                           | 85,288 
|                                                                                                               |  |                                           |        
|Net
  cash provided by (used in) operating activities                                                          |  |                                           | 152,645
|                                                                                                               |  |                                           |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                          |  |                                           |        
|Purchase
  of fixed assets and buildings for lease                                                             |  |                                           | (21,675
|Acquisition
  of subsidiaries consolidated for the
       first time (a)                                       |  |                                           | (11,033
|Investment
  in associated companies                                                                           |  |                                           | (984   
|Sale
  of investment designated for sale                                                                       |  |                                           |        
|Other
  investments acquired                                                                                   |  |                                           | (255   
|Proceeds
  from sale of investment in an
       associated company                                             |  |                                           |        
|Proceeds
  from sale of fixed assets                                                                           |  |                                           | 4,609  
|Decrease
  (increase) in short-term deposits, net                                                              |  |                                           | 5,918  
|Increase
  in restricted cash                                                                                  |  |                                           |        
|Grant
  of long-term loans                                                                                     |  |                                           |        
|Increase
  in long-term deposits                                                                               |  |                                           | (10,913
|Sale
  (purchase) of short-term marketable securities - net                                                    |  |                                           | (388   
|                                                                                                               |  |                                           |        
|Net
  cash provided by (used in) investing activities                                                          |  |                                           | (34,721
|                                                                                                               |  |                                           |        

F-10

---

---

(Continued) - 3

BARAN GROUP LTD.

(An Israeli Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                               |  | Year ended December 31                    |        
|---------------------------------------------------------------------------------------------- |  | ----------------------------------------- | -------
|                                                                                               |  |                                           |        
|                                                                                               |  | 2001                                      |        
|                                                                                               |  |                                           |        
|                                                                                               |  | Adjusted new Israeli shekels 
  (note 1b) |        
|                                                                                               |  |                                           |        
|                                                                                               |  | I n   t h o u s a n d s                   |        
|                                                                                               |  |                                           |        
|                                                                                               |  |                                           |        
|Brought forward                                                                                |  |                                           | 117,924
|                                                                                               |  |                                           |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                          |  |                                           |        
|Issuance
  of restricted shares                                                                |  |                                           | 195    
|Long-term
  bank loans received                                                                |  |                                           | 25,566 
|Repayment
  of long-term bank loans                                                            |  |                                           | (27,009
|Dividend
  paid                                                                                |  |                                           | (32,061
|Dividend
  paid to minority shareholders in a subsidiary                                       |  |                                           |        
|Cost
  of acquisition of Company shares held by
          a subsidiary                         |  |                                           |        
|Capital
  note issued to minority in a subsidiary                                              |  |                                           |        
|Short-term
  bank credit  net                                                                 |  |                                           | 28,342 
|Short-term
  bank loans  net                                                                  |  |                                           | 7,465  
|                                                                                               |  |                                           |        
|Net
  cash provided by financing activities                                                    |  |                                           | 2,498  
|TRANSLATION DIFFERENCES ON CASH
       BALANCES OF SUBSIDIARIES OPERATING
       INDEPENDENTLY |  |                                           | (10    
|                                                                                               |  |                                           |        
|INCREASE (DECREASE) IN CASH AND CASH
       EQUIVALENTS                                        |  |                                           | 120,412
|BALANCE OF CASH AND CASH EQUIVALENTS
       AT BEGINNING OF YEAR                               |  |                                           | 98,177 
|                                                                                               |  |                                           |        
|BALANCE OF CASH AND CASH EQUIVALENTS
       AT END OF YEAR                                     |  |                                           | 218,589
|                                                                                               |  |                                           |        

F-11

---

---

(Concluded) - 4

BARAN GROUP LTD.

(An Israeli Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                                                                                                                                              |  | Year ended December 31                    |        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------- | -------
|                                                                                                                                                                                                                              |  |                                           |        
|                                                                                                                                                                                                                              |  | 2001                                      |        
|                                                                                                                                                                                                                              |  |                                           |        
|                                                                                                                                                                                                                              |  | Adjusted new Israeli shekels 
  (note 1b) |        
|                                                                                                                                                                                                                              |  |                                           |        
|                                                                                                                                                                                                                              |  | I n   t h o u s a n d s                   |        
|                                                                                                                                                                                                                              |  |                                           |        
|                                                                                                                                                                                                                              |  |                                           |        
|Supplementary disclosure of cash flow information -cash
     paid during the year for:                                                                                                                                        |  |                                           |        
|Interest                                                                                                                                                                                                                      |  |                                           | 6,474  
|                                                                                                                                                                                                                              |  |                                           |        
|Income
  tax - net of tax refund                                                                                                                                                                                              |  |                                           | 36,008 
|                                                                                                                                                                                                                              |  |                                           |        
|(a) Acquisition of subsidiaries consolidated for the first time
     (in 2001 companies previously consolidated by the
     proportionate consolidation method which were fully
     consolidated),see also note 2a, b and c: |  |                                           |        
|Assets
  and liabilities of the subsidiaries upon acquisition:                                                                                                                                                                |  |                                           |        
|Working
  capital (excluding cash and cash equivalents)                                                                                                                                                                       |  |                                           | (5,762 
|Investment
  in subsidiary of the acquired company
           that is designated for
  sale                                                                                                                                   |  |                                           |        
|Fixed
  and other assets - net                                                                                                                                                                                                |  |                                           | (13,539
|Customer
  contracts and customer list                                                                                                                                                                                        |  |                                           | (2,533 
|Long-term
  receivables                                                                                                                                                                                                       |  |                                           |        
|Long-term
  liabilities                                                                                                                                                                                                       |  |                                           | 11,087 
|Minority
  interests in the subsidiaries upon acquisition                                                                                                                                                                     |  |                                           | 5,534  
|Goodwill
  arising on acquisition                                                                                                                                                                                             |  |                                           | (5,820 
|Other
  investment                                                                                                                                                                                                            |  |                                           |        
|Issuance
  of share capital                                                                                                                                                                                                   |  |                                           |        
|                                                                                                                                                                                                                              |  |                                           |        
|                                                                                                                                                                                                                              |  |                                           | (11,033
|                                                                                                                                                                                                                              |  |                                           |        
|                                                                                                                                                                                                                              |  |                                           |        
|Supplementary information on investing and financing activities   not
  involving cash flows:                                                                                                                                 |  |                                           |        
|Long-term
  suppliers credit received during the year for the
        purchase of machinery and equipment                                                                                                                    |  |                                           |        
|                                                                                                                                                                                                                              |  |                                           |        

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

F-12

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All NIS amounts are presented in adjusted new Israeli shekels at
December 31, 2003 purchasing power, unless otherwise stated)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:

| | a. | General:
| | -- | --------
| |    |         
| |    | 1)      
| |    |         
| |    |         
| |    |         
| |    |         
| |    |         
| |    |         
| |    |         
| |    |         
| |    |         
| |    |         
| |    |         
| |    |         
| |    |         
| |    |         

F-13

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES(continued):

| |  | 2) | Definitions:                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |    | Subsidiary -                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |    | Proportionatelyconsolidated companyor joint venture                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |    | Associated company -                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |    | Investee company -                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |    | Related parties -                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |    | Goodwill -                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |    | The Group -                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | 3) | For a list of
  subsidiaries, proportionately consolidated companies, proportionately
  consolidated joint ventures and associated companies, see appendix I.                                                                                                                                                                                                                                                                                                         
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | 4) | Use of estimates in the
  preparation of financial statements                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |    | The preparation of
  financial statements in conformity with generally accepted accounting
  principles (GAAP) requires management to make estimates and assumptions
  that affect the reported amounts of assets and liabilities and disclosures of
  contingent assets and liabilities at the date of the financial statements and
  the reported amounts of revenues and expenses during the reporting years.
  Actual results could differ from those estimates.
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-14

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES(continued):

| |    | 5)                               | Accounting principles                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                  | The financial statements
  have been prepared in accordance with Israeli GAAP. As applicable to these
  financial statements, Israeli GAAP vary in certain significant respects from
  U.S. GAAP, as described in note 20.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | b. | Adjusted financial
  statements:
| |    |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | 1)                               | The financial statements
  have been prepared on the basis of historical cost 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
  (hereafter - the Israeli Institute). All figures in the financial statements are
  presented in adjusted new Israeli shekels (NIS) which have a uniform
  purchasing power as of December 31, 2003 (adjusted NIS) - based upon
  the changes in the Israeli consumer price index (hereafter - the Israeli
  CPI),see also note 14b. As to the discontinuance
  of adjusting financial statements for the effects of inflation, with effect
  from January 1, 2004, see t. below.                                                                                            
| |    |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                  | The adjustment of the financial
  statements is based on the accounts of the Company, its Israeli subsidiaries
  and proportionately consolidated companies and joint ventures, which are
  maintained in nominal NIS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                  | As to investee companies
  whose financial statements are drawn up in foreign currency, see (3) below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                  | The components of the
  statements of income (loss) were, for the most part, adjusted as follows: the
  components relating to transactions carried out during the reported years-revenues, purchases, labor costs, etc. were
  adjusted on the basis of the Israeli CPI for the month in which the transaction
  was carried out, while those relating to non-monetary balance sheet items
  (mainly changes in inventories, work in progress, customer advances,
  depreciation and amortization) were adjusted on the same basis used in
  adjusting the related balance sheet item. The financing component represents
  primarily financial income and expenses in real terms, the erosion of
  balances of monetary items during the reported years and changes in the value
  of short-term marketable securities during the reported years.
| |    |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | 2)                               | The adjusted amounts of
  non-monetary assets do not necessarily represent realization value or current
  economic value, but only the original historical values, adjusted for the
  changes in the general purchasing power of Israeli currency. In these financial
  statements, the term cost signifies cost in adjusted NIS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-15

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES(continued):

| |    | 3)                             | Investee companies whose
  financial statements are drawn up in foreign currency.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | ------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                | For purposes of
  consolidation, the amounts (in foreign currency terms) included in the
  financial statements of the above companies were treated as follows:                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                | Subsidiaries
  and Proportionately consolidated companies operating independently                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                | Balance sheet items at the
  end of the year and the results of operations for the year were translated at
  the exchange rate of the relevant foreign currency as compared to Israeli
  currency at the end of the year. Balance sheet items at the beginning of the
  year and changes in shareholders equity items during the year were
  translated at the relevant exchange rate at the beginning of the year or at
  the date of each change, respectively, and then adjusted on the basis of the
  changes in the Israeli CPI through the end of the year.
| |    |                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                | Differences resulting from
  the above treatment are carried as a separate item under adjusted
  shareholders equity (differences from translation of foreign currency financial
  statements of subsidiaries and a proportionately
  consolidated company).                                                                                                                                                                                                                                                                                                   
| |    |                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                | Investee
  companies, the activities of which are an integral part of the activities of
  the Company                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                | The financial statements
  of such companies were remeasured in terms of adjusted NIS. The remeasurement
  was effected by way of translation of the amounts (in terms of foreign
  currency) on the basis of historical exchange rates in relation to Israeli
  currency; the resulting nominal NIS amounts were then adjusted on the basis
  of the changes in the Israeli CPI by the same method used in the adjustment
  of the financial statements of the Israeli
  companies in the Group.                                                                 
| |    |                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                | Differences resulting from
  the above treatment are included in the adjusted statements of income (loss)
  under financial income or expenses.                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | 4)                             | Convenience translation
  into U.S. dollars (dollars or $)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                | The adjusted NIS figures
  at December 31, 2003 and for the year then ended have been translated into
  dollars using the representative exchange rate of the dollar at December 31,
  2003 ($1 = NIS 4.379). The translation was made solely for convenience.
  The translated dollar figures should not be construed as a representation
  that the Israeli currency amounts actually represent, or could be converted
  into, dollars.                                                                                                                         
| |    |                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | c. | Principles
  of consolidation:
| |    |                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | 1)                             | The consolidated financial
  statements include the financial statements of the Company and of its
  subsidiaries.  In addition to the
  fully consolidated companies as above, the consolidated financial statements
  include, by the proportionate consolidation method, jointly controlled
  companies and joint ventures.  The
  companies included in consolidation are listed in appendix I.                                                                                                                                                               

F-16

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES(continued):

| |    | 2)                                                                                      | Goodwill is amortized in
  equal annual installments at the rate of 10% per annum, commencing in the
  date of acquisition (see also note 7).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | --------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | 3)                                                                                      | Intercompany balances and
  transactions have been eliminated in consolidation. Profits from intercompany
  sales, not yet realized outside the Group, have also been eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | 4)                                                                                      | Capital notes issued to
  the minority shareholders in one of the subsidiaries are presented in the
  consolidated balance sheets net of the minoritys share in its capital
  deficiency (see also note 9).                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | d. | Inventories                                                                            
| |    |                                                                                        
| |    | Inventories are valued at
  the lower of cost or market. Cost is determined as follows:
| |    |                                                                                        
| |    | Raw materials and supplies
  -
  on first-in,
  first-out basis.                     
| |    |                                                                                        
| |    | Products in process and
  finished products - on basis of production costs:            
| |    |                                                                                        
| |    |                                                                                         | Raw material and supplies
  component -
  on first-in, first-out basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                         | Labor and overhead
  component -
  on average basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | e. | Investments
  in associated companies:                                                 
| |    |                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | 1)                                                                                      | The investments in these
  companies are accounted for by the equity method, net of impairment in value,
  see also note 3(c).  Profits from
  sales not yet realized outside the Group have been eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | 2)                                                                                      | The excess of cost of the
  investment in associated companies over the Companys share in their net
  assets at date of acquisition (excess of cost of investment) represents
  goodwill, which is amortized in equal annual installments at the rate of 10%
  per annum, commencing in the year of acquisition (see also note 3).                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | 3)                                                                                      | As of January 1, 2003, the
  Company reviews 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 in accordance with Accounting Standard
  No. 15 of the Israel Accounting Standards Board (hereafter - the
  IASB) - Impairment of Assets - see also j. below.                                                                                                                                                                                                                                                        
| |    |                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                         | In addition, in accordance
  with Clarification No. 1 to Accounting Standard No. 15, published by the IASB
  in September 2003, investments in associated companies are to be presented at
  the lower of the investment amount under the equity method (before making an
  impairment provision) and its recoverable amount, and so long as the
  recoverable value, on which the impairment provision was based, remains
  unchanged, the Company will record its share in the associated companys
  losses - up to the amount of the impairment provision - by reducing the
  aforesaid provision without having an effect on the Companys results.

F-17

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES(continued):

| |    |                                                | The Company has adopted
  the provisions of the clarification with effect from July 1, 2003. Prior
  to the publication of the clarification, during the period through
  June 30, 2003, the Company charged its share in associated companies
  losses directly to income, without reducing the impairment provision that was
  created in 2001 - see also note 3c.                                                                           
| | -- | ---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | 4)                                             | In accordance with
  Clarification No. 1 of Israeli Accounting Standard No. 15, the loss from
  impairment of the investment in an associated company, and the subsequent
  adjustment to the value of the impairment provision, are presented in the
  statements of income (loss) among share in profits (losses) of associated
  companies.  Prior years amounts have
  been reclassified to conform with such presentation.  See note 3d.
| |    |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | f. | Marketable
  securities and other investments:
| |    |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | 1)                                             | Short-term marketable securities
  are stated at market value or-for
  mutual fund participation certificates - at redemption value.
  The changes in value of the above securities are carried to financial
  income or expense.                                                                                                                                                                                                               
| |    |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | 2)                                             | Investments in
  non-marketable securities are stated at cost. The Group evaluates its
  investments in these securities from time to time and, as necessary, includes
  in its accounts a write-down for decrease in value which is not of a
  temporary nature.                                                                                                                                                                               
| |    |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | g. | Land and
  buildings for lease:               
| |    |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | 1)                                             | These assets are stated at
  cost.                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | 2)                                             | Borrowing costs in respect
  of bank loans used to finance the construction - incurred until construction
  is completed-
   are charged to cost of
  such assets.                                                                                                                                                                                                                                                                              
| |    |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | 3)                                             | The buildings are
  depreciated by the straight-line method, on basis of their estimated useful
  life. Annual depreciation rates are 4%-6%.                                                                                                                                                                                                                                                                                                    
| |    |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | h. | Fixed
  assets:                               
| |    |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | 1)                                             | These assets are stated at
  cost.  Fixed assets of subsidiaries,
  which existed at the date of acquisition of the subsidiary by the Company,
  are included at their fair value as of that date.                                                                                                                                                                                                                                              
| |    |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | 2)                                             | Borrowing costs in respect
  of credit used to finance the construction of the buildings - incurred until
  their construction is completed - are charged to the cost of such assets.                                                                                                                                                                                                                                                           

F-18

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES(continued):

| |    | 3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | The assets are depreciated
  by the straight-line method, on the basis of their estimated useful life.
  Annual depreciation rates are as follows:              
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Buildings                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Machinery and
  equipment                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Vehicles                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Office
  furniture and equipment                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Computers and
  peripheral equipment                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Communication
  sites                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Leasehold improvements are
  amortized by the straight-line method over the lease period, which is shorter
  than the estimated useful life of the improvements.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                 
| | i. | Goodwill
  and other intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Customer contracts are
  amortized over the contract period, commencing from the date on which they
  are first utilized (mainly 1-3 years) and customer lists are amortized over 3
  years commencing from the date on which they are first utilized.  As to the amortization of goodwill, see
  c(2), and e. above.                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | j. | Impairment
  of assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | In February 2003, Israeli
  Accounting Standard No. 15 - Impairment of Assets, became
  effective.  This standard requires a
  periodic review to evaluate the need for a provision for the impairment of
  the Companys non-monetary assets - fixed assets and identifiable
  intangibles, including goodwill, as well as investments in associated companies.                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Accordingly, commencing
  2003, the Company assesses 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 one or more of the above assets.  When such indicators of impairment are
  present, the Company evaluates whether the carrying value of the assets 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.                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | When it is not possible to
  assess whether an impairment provision is required for a particular asset on
  its own, the need for such a provision is assessed in relation to the
  recoverable value of the cash-generating unit to which that asset
  belongs.  A cash-generating unit includes
  goodwill allocated to that unit, and any impairment loss relating to that
  unit is initially allocated to the goodwill and then to the other assets.                                                                                                                                                            

F-19

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES(continued):

| |    | 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.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Through December 31, 2002,
  the Company applied the provisions for assessing and recording impairment of
  long-lived assets prescribed by the U.S. standard FAS 121.                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The adoption of Israeli
  Accounting Standard No. 15 on January 1, 2003 had no effect on the
  Companys financial statements.                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | In 2003, the Company
  recorded an impairment in respect of goodwill and fixed assets, see note
  2a(2)(a) and 2a(2)(b).                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | k. | Deferred
  income taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | 1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | 2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | 3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F-20

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES(continued):

| |    |                        | b)                                                                                                                                                                                                                                                                                                              | As stated in notes
  13a(1)(a)(i) and 13a(1)(a)(ii), another subsidiary in the Group has been
  granted approved enterprise status and is subject to a reduced tax rate
  during the period of benefits.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | ---------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                        |                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                        |                                                                                                                                                                                                                                                                                                                 | Upon distribution of
  dividends by this subsidiary to the Company, the Company will be subject to
  tax, unless such dividends are distributed onwards to the Companys
  shareholders.  In light of the Groups
  policy not to cause distribution of dividends, which would result in additional
  tax liabilities, any dividends received from this subsidiary will be
  distributed to the Companys shareholders. 
  The Company plans to distribute to its shareholders any dividends
  received.  Accordingly, no account has
  been taken of the additional tax in respect of said dividends.                                                          
| |    |                        |                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | L. | Revenue
  recognition:
| |    |                        |                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | 1)                     | Sale of products                                                                                                                                                                                                                                                                                               
| |    |                        |                                                                                                                                                                                                                                                                                                                
| |    |                        | Revenue from the sale of
  products (consisting of electric switches and recycling of food products for
  animals), net of discounts, is recognized when there is compelling evidence
  of arrangement, delivery has occurred, the sale price is fixed or
  determinable, and collection is reasonably assured.
| |    |                        |                                                                                                                                                                                                                                                                                                                
| |    | 2)                     | Construction projects:                                                                                                                                                                                                                                                                                         
| |    |                        |                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                        | a)                                                                                                                                                                                                                                                                                                              | The Group recognizes
  revenue from such projects by the percentage of completion method, provided
  that the following conditions are met: collection of the revenues is
  expected, revenues and costs can be estimated reasonably, and there is a
  likelihood that the project will be completed and that contractual
  obligations to customers will be met. 
  Pending compliance with all of the above conditions, revenue is
  recognized to the extent of costs actually incurred, whose reimbursement is
  anticipated (zero profit method).                                                                                                      
| |    |                        |                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                        |                                                                                                                                                                                                                                                                                                                 | In addition to the
  above-mentioned revenue recognition conditions, profits from contract work on
  buildings are recognized by the percentage of completion method, if the stage
  of completion has reached at least 25%; prior to this stage  by the zero
  profit method.                                                                                                                                                                                                                                                                                                                                                                               
| |    |                        |                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                        |                                                                                                                                                                                                                                                                                                                 | The Group measures
  progress toward completion based on the output measure of value added for its
  turnkey projects.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                        |                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                        |                                                                                                                                                                                                                                                                                                                 | The Group determines the
  relative value added of each component to the total project value added,
  based on the ratio of costs of the component to total expected costs, at the
  commencement of the project.  Such
  ratio of relative value of each component remains unchanged during the
  project.  Relevant component output
  measures are used to determine progress toward completion of each
  component.  The project percentage of
  completion (weighting the appropriate components) are applied to the total
  estimated project revenues and project costs to determine the amount of
  revenue and costs recognized, on a cumulative basis.
| |    |                        |                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                        |                                                                                                                                                                                                                                                                                                                 | Changes in estimates for
  revenues, costs and profits are recognized in the period in which they are
  determinable using the cumulative catch up method of accounting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-21

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES(continued):

| |    |                                                                                                                                                                                                                                                                                                                                                                                                 | b)                                                                                                                                                                                                                                                    | Full provision is made for
  any anticipated losses on projects.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                       |                                                                 
| |    | 3)                                                                                                                                                                                                                                                                                                                                                                                              | Provision for warranty
  costs                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                 | The provision for warranty
  costs is determined for specific projects in respect of which there are
  warranty obligations.  The calculation
  of anticipated warranty costs is made based on the work required and the
  remaining warranty period.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                      
| |    | 4)                                                                                                                                                                                                                                                                                                                                                                                              | Revenue from lease of
  buildings is recognized over the lease period.                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                       |                                                                 
| | m. | Company
  shares held by the Company and its subsidiaries                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                
| |    | These shares are presented
  as a reduction of shareholders equity, at their cost, under the item Cost
  of Company shares held by the Company and its subsidiaries.                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                
| | n. | Allowance
  for doubtful accounts                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The allowance is
  determined for specific debts doubtful of collection.                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                
| | o. | Derivative
  instruments                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The Group enters into
  future contracts in order to protect itself from changes in prices of certain
  commodities.  These future contracts
  are treated for accounting purposes as non-hedging instruments.  The commodity derivative instruments are
  presented at their fair value and changes in their fair value are carried to
  financial income (expenses)net on a current basis.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                
| |    | In 2002, the Group also
  entered into foreign exchange forward contracts in order to effectively hedge
  the cash flows resulting from firm commitments for inventory purchases in
  non-NIS currencies.  Gains and losses
  from such contracts were deferred and recognized in income when the hedged
  item affected earnings.                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                
| | p. | 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.                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                
| | q. | Earnings
  (loss) per share                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Earnings (loss) per share
  - which is computed in accordance with Opinion 55 of the Israeli
  Institute - has been determined on the basis of the weighted average number
  of shares outstanding during the year, including restricted shares, net of the
  weighted average number of shares and restricted shares, held by the Company
  and its subsidiaries.                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                
| |    | In the 2001and 2002
  financial statements, the basic and diluted earnings per share are not
  presented separately, since the difference is immaterial (less than 5%).  In 2003, 74,000 options are not included
  in the diluted loss per share since their effect is anti-dilutive.                                                                                                         

F-22

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES(continued):

| | r. | Research
  and development expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | Research and development
  expenses are charged to income as incurred. 
  Participation from government departments for development of approved
  projects is recognized as a reduction of expenses as the related cost is
  incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | In 2001, 2002 and 2003, no
  participations were received.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | s. | Advertising
  expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | These costs are expensed
  as incurred.  Advertising expenses for
  the years ended December 31, 2001, 2002 and 2003 amounted to adjusted
  NIS 2,647,000, adjusted NIS 4,249,000 and adjusted
  NIS 3,466,000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | t. | Recently
  issued accounting pronouncements in Israel                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | In October 2001, the IASB
  issued Israeli Accounting Standard No. 12 - Discontinuance of Adjusting
  Financial Statements for Inflation, which provided for the discontinuance of
  adjusting financial statements for the effects of inflation, as of
  January 1, 2003.  In
  December 2002, Israeli Accounting Standard No. 17 was issued that
  postponed the date from which Israeli Accounting Standard No. 12 is to be
  applied until January 1, 2004. 
  The inflation-adjusted amounts as of December 31, 2003, as
  presented in these financial statements, will be the basis for the
  nominal-historical financial reporting in the following periods.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | The implementation of
  Israeli Accounting Standard No. 12 will mainly affect the financial income
  (expenses).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | Upon implementation of
  Israeli Accounting Standard No. 12, Clarifications No. 8 and 9 to
  Opinion 36 of the Israeli Institute will be canceled and will be
  replaced with effect from January 1, 2004 by Israeli Accounting Standard
  No. 13  Effect of Change in Foreign Currency Exchange Rates, which was
  issued at the same time as Israeli Accounting Standard No. 12.  Most of the provisions of Israeli
  Accounting Standard No. 13 correspond to the provisions, which appeared
  in the above-mentioned clarifications. Nevertheless, the following matters
  will affect the translation of the financial statements of overseas
  operations:    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | Goodwill resulting from
  the acquisition of such operations will be treated  commencing from the date
  that this standard comes into effect  as an asset of the investee company
  and will be translated into NIS as stipulated by the standard (formerly,
  goodwill was treated as an asset of the holding company).                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | Operating results from
  overseas operations will be translated into NIS at the exchange rates
  existing on the dates of the transactions (or at the average exchange rates
  for the period, where these approximate the actual exchange rates), and not
  at the year-end exchange rate.                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | u. | Reclassifications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | Certain prior years
  amounts have been reclassified to conform with the current year presentation.
  See also e above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-23

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 2 - | SUBSIDIARIES
  AND PROPORTIONATELY CONSOLIDATED COMPANIES AND JOINT VENTURES:
|-------- | -----------------------------------------------------------------------------
|         |                                                                              
|         | a.                                                                           
|         |                                                                              
|         |                                                                              
|         |                                                                              
|         |                                                                              
|         |                                                                              
|         |                                                                              

|                        |  |  | January 1,2003              |      
|----------------------- |  |  | --------------------------- | -----
|                        |  |  |                             |      
|                        |  |  | Adjusted NIS
  in thousands |      
|                        |  |  |                             |      
|                        |  |  |                             |      
|Current assets          |  |  |                             | 1,011
|Fixed assets            |  |  |                             | 67   
|                        |  |  |                             |      
|T
  o t a l assets      |  |  |                             | 1,078
|                        |  |  |                             |      
|                        |  |  |                             |      
|Current liabilities     |  |  |                             | 1,055
|Long-term liabilities   |  |  |                             | 23   
|                        |  |  |                             |      
|T
  o t a l liabilities |  |  |                             | 1,078
|                        |  |  |                             |      
|                        |  |  |                             | -,-  
|                        |  |  |                             |      

F-24

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 2 - | SUBSIDIARIES
  AND PROPORTIONATELY CONSOLIDATED COMPANIES AND JOINT VENTURES(continued):
|-------- | ----------------------------------------------------------------------------------------
|         |                                                                                         
|         |                                                                                         

| |                                                                          |  |  | December 31, 2003           |     
| | ------------------------------------------------------------------------ |  |  | --------------------------- | ----
| |                                                                          |  |  |                             |     
| |                                                                          |  |  | Adjusted NIS
  in thousands |     
| |                                                                          |  |  |                             |     
| | Balance sheet:                                                           |  |  |                             |     
| |                                                                          |  |  |                             |     
| | Cash
  and cash equivalents                                              |  |  |                             | 165 
| | Other
  current assets:                                                  |  |  |                             |     
| | Trade
  and income receivable                                            |  |  |                             | 514 
| | Other
  receivables                                                      |  |  |                             | 74  
| | Deferred
  taxes                                                         |  |  |                             | 17  
| |                                                                          |  |  |                             |     
| | Fixed
  assets, less accumulated depreciation and           amortization |  |  |                             | 51  
| |                                                                          |  |  |                             |     
| | Current
  liabilities:                                                   |  |  |                             |     
| | Trade
  payables                                                         |  |  |                             | (458
| | Other
  payables                                                         |  |  |                             | (194
| |                                                                          |  |  |                             |     
| | Long-term
  liabilities:                                                 |  |  |                             |     
| | Liability
  for employee rights upon retirement                          |  |  |                             | (48 
| | Minority
  interests                                                     |  |  |                             | (5  
| |                                                                          |  |  |                             |     
| |                                                                          |  |  |                             | 116 
| |                                                                          |  |  |                             |     

| |                    |  |  | Period from date of
  acquisition to
  December 31, 2003 |      
| | ------------------ |  |  | -------------------------------------------------------- | -----
| |                    |  |  |                                                          |      
| |                    |  |  | Adjusted NIS
  in thousands                              |      
| |                    |  |  |                                                          |      
| |                    |  |  |                                                          |      
| | Statement of loss: |  |  |                                                          |      
| |                    |  |  |                                                          |      
| | Revenues           |  |  |                                                          | 1,744
| |                    |  |  |                                                          |      
| | Cost
  of revenues |  |  |                                                          | 1,337
| |                    |  |  |                                                          |      
| | Net
  income       |  |  |                                                          | 8    
| |                    |  |  |                                                          |      

F-25

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 2 - | SUBSIDIARIES
  AND PROPORTIONATELY CONSOLIDATED COMPANIES AND JOINT VENTURES(continued):
|-------- | ----------------------------------------------------------------------------------------
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         

F-26

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 2 - | SUBSIDIARIES
  AND PROPORTIONATELY CONSOLIDATED COMPANIES AND JOINT VENTURES(continued):
|-------- | ----------------------------------------------------------------------------------------
|         |                                                                                         
|         |                                                                                         

|                                                                        |  | October 31,2002             |        
|----------------------------------------------------------------------- |  | --------------------------- | -------
|                                                                        |  |                             |        
|                                                                        |  | Adjusted NIS
  in thousands |        
|                                                                        |  |                             |        
|                                                                        |  |                             |        
|Current assets                                                          |  |                             | 49,008 
|Investment in subsidiary
  of o2
       designated for sale*            |  |                             | 4,467  
|Long-term receivables                                                   |  |                             | 481    
|Fixed assets, net of
  accumulated
       depreciation and amortization |  |                             | 3,177  
|Goodwill                                                                |  |                             | 89,496 
|Customer list                                                           |  |                             | 3,607  
|                                                                        |  |                             |        
|T
  o t a l assets                                                      |  |                             | 150,236
|                                                                        |  |                             |        
|                                                                        |  |                             |        
|Current liabilities                                                     |  |                             | 114,654
|Provision for
  reorganization**                                        |  |                             | 6,191  
|                                                                        |  |                             |        
|                                                                        |  |                             | 120,845
|Long-term liabilities                                                   |  |                             | 2,104  
|                                                                        |  |                             |        
|T
  o t a l liabilities                                                 |  |                             | 122,949
|                                                                        |  |                             |        
|Net assets acquired                                                     |  |                             | 27,287 
|                                                                        |  |                             |        

| |  |  |  | *                                                                                                                                                                                                                                                                      | On January 31, 2003,
  BTI signed an agreement for the sale of its investment in a subsidiary, in
  accordance with the decision taken by the Board of Directors on June 4,
  2002.  Accordingly, the temporarily
  controlled subsidiary has not been consolidated upon acquisition.  The investment in that subsidiary was
  presented at its fair value, net of realization costs.  The investment was sold in February 2003.                        
| |  |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  |  |                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |  |  | **                                                                                                                                                                                                                                                                     | During 2001, a
  reorganization program was implemented by o2 including a reduction in the
  size of its workforce, closure of branches and the amalgamation of
  headquarters.  As of the date of
  acquisition, the provision consisted mainly of adjusted NIS
  3,740,000 for closure of branches and adjusted NIS 1,845,000 for workforce
  reduction.  During 2003, the provision
  was fully paid and no balance remained as of December 31, 2003.
| |  |  |  |                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |  |  | On February 27, 2003,
  the Company in general meeting approved the issuance of 116,000
  non-marketable Company options to o2 employees (see note 12e), who were taken
  on as staff of a U.S. subsidiary, wholly owned by BTI.  74,000 options were granted in 2003.

F-27

---

---

BARAN GROUP LTD.(An Israeli
Corporation)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 2 - | SUBSIDIARIES
  AND PROPORTIONATELY CONSOLIDATED COMPANIES AND JOINT VENTURES(continued):
|-------- | ----------------------------------------------------------------------------------------
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         

| |                         |  | October 31,2002             |         
| | ----------------------- |  | --------------------------- | --------
| |                         |  |                             |         
| |                         |  | Adjusted NIS,in
  thousands |         
| |                         |  |                             |         
| |                         |  |                             |         
| | Current assets          |  |                             | 2,244   
| | Fixed assets            |  |                             | 296     
| | Goodwill                |  |                             | 2,673   
| |                         |  |                             |         
| | T
  o t a l assets      |  |                             | 5,213   
| |                         |  |                             |         
| |                         |  |                             |         
| | Current liabilities     |  |                             | 1,181   
| | Long-term liabilities   |  |                             | (562,837
| |                         |  |                             |         
| | T
  o t a l liabilities |  |                             | 2,540   
| |                         |  |                             |         
| | Net assets acquired     |  |                             | 2,673   
| |                         |  |                             |         

F-28

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 2 - | SUBSIDIARIES
  AND PROPORTIONATELY CONSOLIDATED COMPANIES AND JOINT VENTURES(continued):
|-------- | ----------------------------------------------------------------------------------------
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         

F-29

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 2 - | SUBSIDIARIES
  AND PROPORTIONATELY CONSOLIDATED COMPANIES AND JOINT VENTURES(continued):
|-------- | ----------------------------------------------------------------------------------------
|         |                                                                                         
|         | b.                                                                                      
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         | c.                                                                                      
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         

F-30

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 2 - | SUBSIDIARIES
  AND PROPORTIONATELY CONSOLIDATED COMPANIES AND JOINT VENTURES(continued):
|-------- | ----------------------------------------------------------------------------------------
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         

F-31

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 2 - | SUBSIDIARIES
  AND PROPORTIONATELY CONSOLIDATED COMPANIES AND JOINT VENTURES(continued):
|-------- | ----------------------------------------------------------------------------------------
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         
|         |                                                                                         

|                                                                                                        |  | December 31                 |        
|------------------------------------------------------------------------------------------------------- |  | --------------------------- | -------
|                                                                                                        |  |                             |        
|                                                                                                        |  | 2002                        |        
|                                                                                                        |  |                             |        
|                                                                                                        |  | Adjusted NIS
  in thousands |        
|                                                                                                        |  |                             |        
|                                                                                                        |  |                             |        
|Assets:                                                                                                 |  |                             |        
|Current
  assets                                                                                        |  |                             | 54,818 
|Deferred
  taxes                                                                                        |  |                             | 153    
|Land
  and building for lease, less
            accumulated
  depreciation and
            amortization |  |                             | 61,718 
|                                                                                                        |  |                             |        
|Fixed
  assets, less accumulated
            depreciation and
  amortization                            |  |                             | 16,283 
|                                                                                                        |  |                             |        
|                                                                                                        |  |                             | 132,972
|                                                                                                        |  |                             |        
|Liabilities:                                                                                            |  |                             |        
|Current
  liabilities                                                                                   |  |                             | 58,965 
|Long-term
  liabilities                                                                                 |  |                             | 32,301 
|                                                                                                        |  |                             |        
|                                                                                                        |  |                             | 91,266 
|                                                                                                        |  |                             |        

| |  |  | b) | Operating results data:
| |  |  | -- | -----------------------

|                          |  | Year ended December 31    |        
|------------------------- |  | ------------------------- | -------
|                          |  |                           |        
|                          |  | 2001                      |        
|                          |  |                           |        
|                          |  | Adjusted NIS in thousands |        
|                          |  |                           |        
|Revenues                  |  |                           | 345,575
|                          |  |                           |        
|Gross profit              |  |                           | 50,303 
|                          |  |                           |        
|Operating
  income (loss) |  |                           | 35,375 
|                          |  |                           |        
|Net income
  (loss)       |  |                           | 24,732 
|                          |  |                           |        

F-32

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 2 - | SUBSIDIARIES
  AND PROPORTIONATELY CONSOLIDATED COMPANIES AND JOINT VENTURES(continued):
|-------- | ----------------------------------------------------------------------------------------
|         |                                                                                         
|         |                                                                                         

|                                                             |  | Year ended December 31    |        
|------------------------------------------------------------ |  | ------------------------- | -------
|                                                             |  |                           |        
|                                                             |  | 2001                      |        
|                                                             |  |                           |        
|                                                             |  | Adjusted NIS in thousands |        
|                                                             |  |                           |        
|                                                             |  |                           |        
|Net cash
  provided by (used in)
       operating activities |  |                           | 126,751
|                                                             |  |                           |        
|Net cash
  provided by (used in)
       investing activities |  |                           | 3,320  
|                                                             |  |                           |        
|Net cash
  provided by (used in)
       financing activities |  |                           | (12,921
|                                                             |  |                           |        

| | d. | Companies
  previously consolidated by the proportionate consolidation method, which were
  fully consolidated in 2001                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | In 2001, the financial
  statements of E.O.D., which were included by the proportionate consolidation
  method until September 30, 2001, were fully consolidated for the first time.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | The Company owns 50% of
  the voting common stock of E.O.D and another party owns the other 50%.  Pursuant to a change in the Articles of
  Association on October 1, 2001, which was agreed between all shareholders,
  the Company is entitled to stipulate 3 out of the 5 directors of EOD.  From the time of  the change in the Articles of Association, the Company has
  included EOD in consolidation, since it effectively controls E.O.D through
  its majority Board representation. 
  Such Articles of Association cannot be changed without a majority vote
  of the common shares, which effectively allows the Company to block any such
  changes - given its ownership of 50% of the voting common shares.  Additionally, declaration and payment of
  dividends are not required to have shareholder approval; such decisions are
  made by the Board of Directors.  The only
  decisions that are subject to shareholder voting are: (i) appointment of the
  auditors; (ii) increase in the authorized share capital; (iii) changes in the
  Articles of Association; (iv) merger; and (v) approval of transactions with
  related parties, following approval by the Board of Directors.

F-33

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 3 - | INVESTMENTS
  IN ASSOCIATED COMPANIES:
|-------- | --------------------------------------
|         |                                       
|         | a.                                    

| |                                                                                                          |  | December 31                 |       
| | -------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------
| |                                                                                                          |  |                             |       
| |                                                                                                          |  | 2002                        |       
| |                                                                                                          |  |                             |       
| |                                                                                                          |  | Adjusted NIS
  in thousands |       
| |                                                                                                          |  |                             |       
| |                                                                                                          |  |                             |       
| | Shares:                                                                                                  |  |                             |       
| | Cost                                                                                                     |  |                             | 21,093
| | Share
  in undistributed profits (net of
            losses)
  accumulated since
            acquisition |  |                             | 10,084
| |                                                                                                          |  |                             |       
| |                                                                                                          |  |                             | 31,177
| |                                                                                                          |  |                             |       
| | Impairment
  in value of investment in
       an associated company (see c below)                        |  |                             | (4,359
| |                                                                                                          |  |                             |       
| | T
  o t a l  investment                                                                                  |  |                             | 26,818
| |                                                                                                          |  |                             |       

| | b. | The
  changes in the investments during 2003 are as follows:
| | -- | ------------------------------------------------------------

| |                                                                             |  | Adjusted NIS
  in thousands |       
| | --------------------------------------------------------------------------- |  | --------------------------- | ------
| |                                                                             |  |                             |       
| |                                                                             |  |                             |       
| | Balance at
  beginning of year                                              |  |                             | 26,818
| | Changes
  during the year:                                                  |  |                             |       
| | Share
  in undistributed losses, net                                        |  |                             | (1,066
| | Change
  in impairment                                                      |  |                             | 449   
| | Dividends
  received from associated companies                              |  |                             | (1,493
| | Sale
  of investments                                                       |  |                             | (411  
| | Reduction
  in percentage of shareholding in associated
            Company |  |                             | (116  
| |                                                                             |  |                             |       
| | Balance at
  end of year                                                    |  |                             | 24,181
| |                                                                             |  |                             |       

F-34

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 3 - | INVESTMENTS
  IN ASSOCIATED COMPANIES(continued):
|-------- | -------------------------------------------------
|         |                                                  
|         | c.                                               
|         |                                                  
|         |                                                  
|         |                                                  
|         |                                                  
|         |                                                  
|         |                                                  
|         |                                                  
|         |                                                  
|         |                                                  
|         |                                                  
|         |                                                  
|         |                                                  
|         |                                                  
|         |                                                  
|         |                                                  
|         |                                                  

F-35

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 4 - | OTHER
  INVESTMENTS, LOANS AND A LONG-TERM RECEIVABLE:
|-------- | ------------------------------------------------------

| |                                                                             |  | December 31                 |       
| | --------------------------------------------------------------------------- |  | --------------------------- | ------
| |                                                                             |  |                             |       
| |                                                                             |  | 2002                        |       
| |                                                                             |  |                             |       
| |                                                                             |  | Adjusted NIS
  in thousands |       
| |                                                                             |  |                             |       
| |                                                                             |  |                             |       
| | Investment
  in shares of a private company held to
       the extent of 5% |  |                             | 1,100 
| | Long-term
  bank deposits (1)                                               |  |                             | 12,130
| | Non-current
  trade receivables (2) (see note 11a(1))                       |  |                             | 14,158
| | Long-term
  loan (3)                                                        |  |                             | 474   
| |                                                                             |  |                             |       
| |                                                                             |  |                             | 27,862
| |                                                                             |  |                             |       

| | (1) | The deposits are linked to
  the exchange rate of the dollar, do not bear interest and are regularly
  rolled-over.                                                                                                                                         
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | The receivables are linked
  to the CPI, do not bear interest and the balance thereof is to be settled by
  December 2004. In 2003 the amount of NIS 14,158,000 is included in the line
  open accounts and checks receivable under accounts receivable.
| |     |                                                                                                                                                                                                                                                             
| | (3) | The loan is linked to the
  Israeli CPI, bears interest at 4% per annum and has no fixed repayment date.                                                                                                                                                    

NOTE 5 -
LAND AND BUILDINGS FOR LEASE:

| | a. | Composed
  as follows:
| | -- | ----------------------

|                                                             |  | December 31                 |       
|------------------------------------------------------------ |  | --------------------------- | ------
|                                                             |  |                             |       
|                                                             |  | 2002                        |       
|                                                             |  |                             |       
|                                                             |  | Adjusted NIS
  in thousands |       
|                                                             |  |                             |       
|                                                             |  |                             |       
|Land                                                         |  |                             | 24,683
|Buildings                                                    |  |                             | 44,412
|                                                             |  |                             |       
|                                                             |  |                             | 69,095
|                                                             |  |                             |       
|L e s s 
  accumulated depreciation and
       amortization |  |                             | (7,377
|                                                             |  |                             |       
|                                                             |  |                             | 61,718
|                                                             |  |                             |       

| |    | Depreciation and
  amortization in respect of buildings totaled
  adjusted NIS 1,550,000, adjusted NIS 1,738,000 and adjusted
  NIS 1,825,000 for the years ended December 31, 2001, 2002 and 2003,
  respectively.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                    
| | b. | The depreciated balance
  includes financial costs capitalized, as of December 31, 2002 and 2003,
  amounting to adjusted NIS 758,000 and adjusted NIS 653,000,
  respectively.                                    
| |    |                                                                                                                                                                                                                    
| | c. | As to pledges registered,
  see note 19.                                                                                                                                                                           
| |    |                                                                                                                                                                                                                    
| | d. | Land is leased under a
  capital lease for 49 years from the Israel Lands Administration.                                                                                                                          

F-36

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5 - LAND AND BUILDINGS FOR LEASE(continued):

| | e. | The land and buildings are
  leased under long-term, non-cancelable without penalty, operating leases to
  various tenants.  The rental payments
  from the tenants are based on the square footage leased, linked to the CPI.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                               
| |    | Minimum annual base rental
  payments under these leases are as follows:                                                                                                                                                      

| |                            |  | Adjusted NIS
  in thousands |       
| | -------------------------- |  | --------------------------- | ------
| |                            |  |                             |       
| |                            |  |                             |       
| | Year
  ending December 31: |  |                             |       
| | 2004                       |  |                             | 14,635
| | 2005                       |  |                             | 13,465
| | 2006                       |  |                             | 7,624 
| | 2007                       |  |                             | 3,608 
| | 2008                       |  |                             | 1,198 
| | 2009
  and thereafter      |  |                             | 1,478 
| |                            |  |                             |       
| | Total                      |  |                             | 42,008
| |                            |  |                             |       

NOTE 6 - FIXED ASSETS:

| | a. | 1)Composition
  of assets and accumulated depreciation and amortization, grouped by major
  classifications, are as follows:
| | -- | ----------------------------------------------------------------------------------------------------------------------------

|                                                             |  | December 31                 |        
|------------------------------------------------------------ |  | --------------------------- | -------
|                                                             |  |                             |        
|                                                             |  | 2002                        |        
|                                                             |  |                             |        
|                                                             |  | Adjusted NIS
  in thousands |        
|                                                             |  |                             |        
|                                                             |  |                             |        
|Land and
  buildings, see b. below                           |  |                             | 52,610 
|Machinery
  and equipment                                    |  |                             | 25,939 
|Vehicles                                                     |  |                             | 20,934 
|Office
  furniture and equipment                             |  |                             | 21,122 
|Leasehold improvements                                       |  |                             | 6,036  
|Computers
  and peripheral equipment                         |  |                             | 20,087 
|Communication
  sites                                        |  |                             | 356    
|                                                             |  |                             |        
|                                                             |  |                             | 147,084
|L e s s 
  accumulated depreciation and
       amortization |  |                             | (74,892
|                                                             |  |                             |        
|                                                             |  |                             | 72,192 
|                                                             |  |                             |        

F-37

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 - FIXED ASSETS (continued):

| |    |                                 | Depreciation and
  amortization in respect of fixed assets totalled adjusted NIS 8,076,000,
  adjusted NIS 13,056,000 and adjusted NIS 12,431,000 for the years
  ended December 31, 2001, 2002 and 2003, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | ------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | 2)                              | Depreciated balance
  includes capitalized borrowing costs amounting to adjusted NIS 330,000 and
  adjusted NIS 284,000 as of December 31, 2002 and 2003, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | b. | Real
  estate rights in Israel:
| |    |                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | 1)                              | In 1997, Baran industries
  entered into a 49-year capital lease agreement with the Israel Lands
  Administration (hereafter -the
  Administration) for the lease of a plot of about 6,400 sqm. in the Omer
  industrial zone.  A building, which is
  used by the Group (hereafter- Baran House), was built on said plot.                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                 | In addition, the Company
  has entered into a capitalized development agreement, which is to be approved
  by the Administration, for a plot of about 5,080 sqm. in the Omer industrial
  zone.  The development agreement was
  for 3 years, commencing March 26, 1997, and was extended until April 1,
  2002.  The Company has not yet
  received a response to its application for a further extension.  As the Company has met the terms
  stipulated in the agreement (including achieving certain milestones that had
  to be reached by predetermined dates), the Administration will sign a lease
  agreement for an additional 49 years. 
  As of the date of the approval of the financial statements, no new
  agreement had been signed.
| |    |                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                 | The costs in respect of
  said plots are composed as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                                 |  | December 31                 |       
|------------------------------------------------ |  | --------------------------- | ------
|                                                 |  |                             |       
|                                                 |  | 2002                        |       
|                                                 |  |                             |       
|                                                 |  | Adjusted NIS
  in thousands |       
|                                                 |  |                             |       
|                                                 |  |                             |       
|Cost of
  land, including capitalized lease fees |  |                             | 1,296 
|Consent fees                                     |  |                             | 7     
|Construction
  costs                             |  |                             | 22,109
|                                                 |  |                             |       
|                                                 |  |                             | 23,412
|                                                 |  |                             |       

F-38

---

---

BARAN GROUP LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 - FIXED ASSETS
(continued):

| |    | 2)                                                         | A
  proportionately consolidated company has constructed a 52,000 sqm. commercial
  center in Beer Sheba, of which about 34,500 sqm. are leased from the
  Administration and about 17,500 sqm. are owned by the above-mentioned
  company, but have not yet been registered in its name with the Land
  Registration Authority due to the parcelization not having been completed.  The proportionately consolidated company
  has carried out an interim procedure, under which it leases the land for a
  period of 999 years.  Said company has
  agreed that the Administration submit a written undertaking to a bank, under
  which the Administration undertakes not to approve the transfer of the rights
  in the above-mentioned land without the consent of the bank and that the
  lease rights would not be registered in the name of the proportionately
  consolidated company, unless, at the same time, a first-ranking mortgage is
  registered in favor of the bank.
| | -- | ---------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | 3)                                                         | On December
  23, 1999, a proportionately consolidated company acquired half the rights to
  land at Beit Dagan, having an area of some 6 acres, from a third party.  The rights to the land include development
  rights in accordance with an agreement signed with the Administration.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                            | Through
  December 31, 2001, NIS 21,612,000 had been paid for the acquisition of
  the rights.  On the date of
  acquisition, a subsidiary signed an agreement with a third party for the
  establishment of a joint venture, which was to construct office buildings and
  commercial space on this land.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                            | In June
  2000, the proportionately consolidated company and the subsidiary signed an
  agreement, whereby the subsidiary was to manage, plan and carry out the
  construction project at Beit Dagan, on behalf of the proportionately
  consolidated company.  The offices
  that have been constructed to date are partly used by the Company for its own
  purposes and partly for lease.  See
  also note 11a(8).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | c. | As to
  pledges registered on the properties, see note 19.

F-39

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7 - GOODWILL AND OTHER INTANGIBLE
ASSETS, NET OF ACCUMULATED AMORTIZATION:

| |                            |  | Original
  amount       |        | Accumulated
  amortization |  | Unamortized
  balance | 
| | -------------------------- |  | ----------------------- | ------ | -------------------------- |  | --------------------- | 
| |                            |  |                         |        |                            |  |                       | 
| |                            |  | December
  31           |        | December
  31              |  | December
  31         | 
| |                            |  |                         |        |                            |  |                       | 
| |                            |  | 2002                    |        | 2003                       |  | 2002                  | 
| |                            |  |                         |        |                            |  |                       | 
| |                            |  | Adjusted
  NIS          |        | Adjusted
  NIS             |  | Adjusted
  NIS        | 
| |                            |  |                         |        |                            |  |                       | 
| |                            |  | I n   t h o u s a n d s |       
| |                            |  |                         |       
| | Customer
  contracts**     |  |                         | 2,438  |                            |  | 2,766                 | 
| | Customer
  lists           |  |                         | 5,054  |                            |  | 5,036                 | 
| |                            |  |                         |        |                            |  |                       | 
| |                            |  |                         | 7,492  |                            |  | 7,802                 | 
| |                            |  |                         |        |                            |  |                       | 
| | Goodwill in
  subsidiaries |  |                         | 99,853 |                            |  | 99,853                | 
| |                            |  |                         |        |                            |  |                       | 

| | *  | Including
  impairment of goodwill of adjusted NIS 36,304,000.  See also note 2.                                                  
| | -- | ----------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                   
| | ** | During 2003,
  the related contract with the customer was completed and the balance of the
  intangible asset was fully amortized.

| | Amortization
  expenses of goodwill for 2001, 2002 and 2003 are adjusted NIS 143,000,
  adjusted NIS 2,386,000 and adjusted NIS 9,744,000, respectively.                  
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                           
| | Amortization
  expenses for other intangible assets for 2001, 2002 and 2003 are adjusted
  NIS 163,000, adjusted NIS 1,490,000 and adjusted NIS 3,823,000,
  respectively.

F-40

---

---

NOTE 8 - LONG-TERM BANK LOANS
(net of current maturities):

| | a. | The
  currency, linkage and interest terms of the loans are as follows:
| | -- | -----------------------------------------------------------------------

| |                                |  | Weighted
  average
  interest rates
  as of
  December 31,
  2003 |             |                                       |      |  |         |  | 
| | ------------------------------ |  | ----------------------------------------------------------------- | ----------- | ------------------------------------- | ---- |  | ------- |  | 
| |                                |  |                                                                   |             |                                       |      |  |         | 
| |                                |  |                                                                   |             |                                       |      |  |         | 
| |                                |  |                                                                   | December 31 |                                      
| |                                |  |                                                                   |             |                                      
| |                                |  |                                                                   | 2002        |                                       | 2003 | 
| |                                |  |                                                                   |             |                                       |      |  |        
| |                                |  | %                                                                 |             | Adjusted
  NISi n   t h o u s a n d s |     
| |                                |  |                                                                   |             |                                       |     
| | In dollars
  or linked thereto |  |                                                                   | *3          |                                       |      |  | 808     |  | 
| | In euros or
  linked thereto   |  |                                                                   | 6.21        |                                       |      |  | 6,302   |  | 
| | Linked to
  the Israeli CPI    |  |                                                                   | 3.94        |                                       |      |  | 166,414 |  | 
| | Unlinked                       |  |                                                                   | 6.85        |                                       |      |  | 16,099  |  | 
| |                                |  |                                                                   |             |                                       |      |  |         |  | 
| |                                |  |                                                                   |             |                                       |      |  | 189,623 |  | 
| | L e s s -
  current maturities |  |                                                                   |             |                                       |      |  | 25,892  |  | 
| |                                |  |                                                                   |             |                                       |      |  |         |  | 
| |                                |  |                                                                   |             |                                       |      |  | 163,731 |  | 
| |                                |  |                                                                   |             |                                       |      |  |         |  | 

* Interest is based on Libor + 1%.

F-41

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8 - LONG-TERM BANK LOANS
(net of current maturities) (continued):

| | b. | The loans
  (net of current maturities) are repayable in the following years after
  balance sheet date:
| | -- | --------------------------------------------------------------------------------------------------------

| |                                          |  | Year ended
  December 31      |        
| | ---------------------------------------- |  | ----------------------------- | -------
| |                                          |  |                               |        
| |                                          |  | 2002                          |        
| |                                          |  |                               |        
| |                                          |  | Adjusted
  NIS
  in thousands |        
| |                                          |  |                               |        
| | Second year                              |  |                               | 25,553 
| | Third year                               |  |                               | 72,179 
| | Fourth year                              |  |                               | 41,894 
| | Fifth year                               |  |                               | 20,488 
| | Sixth year
  and thereafter (until 2034) |  |                               | 3,617  
| |                                          |  |                               |        
| |                                          |  |                               | 163,731
| |                                          |  |                               |        

| | c. | As to liens
  registered to secure the loans, see note 19.       
| | -- | -----------------------------------------------------------------
| |    |                                                                  
| | d. | The terms of
  the loans does not impose additional restrictions.

NOTE
9 - CAPITAL NOTES ISSUED TO MINORITY SHAREHOLDERS OF A SUBSIDIARY, NET:

| | This item
  represents capital notes issued by a subsidiary - Mobipower Ltd. (formerly -
  T.P.S.) (hereafter  Mobipower) to its minority shareholders, after
  deduction of the minoritys share in the subsidiarys capital deficiency, as
  follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                 |  | December
  31                       |       
| | --------------------------------------------------------------- |  | ----------------------------------- | ------
| |                                                                 |  |                                     |       
| |                                                                 |  | 2002                                |       
| |                                                                 |  |                                     |       
| |                                                                 |  | Adjusted NISi n   t h o u s a n d s |       
| |                                                                 |  |                                     |       
| | Capital
  notes issued and accrued interest                     |  |                                     | 19,069
| | Minoritys
  share in Mobipowers 
          capital deficiency |  |                                     | (8,121
| |                                                                 |  |                                     |       
| |                                                                 |  |                                     | 10,948
| |                                                                 |  |                                     |       

| | Mobipower is
  mainly financed by funds from all of its shareholders, through capital
  notes.  These capital notes are linked
  to the Israeli CPI and bear 4% annual interest.  Pursuant to the terms of the capital notes, any repayment of
  amounts related to the capital note arrangements, including linkage
  differences and interest, requires a majority shareholder vote and is
  required to be repaid pro rata to the existing shareholders common stock
  interests at the time of repayment. 
  Accordingly, repayment of the capital notes and any interest is at the
  sole discretion of Baran, the majority owner.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-42

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10 - EMPLOYEE RIGHTS UPON RETIREMENT:

| | The Israeli Group companies                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                       
| | Israeli law
  generally requires payment of severance pay and/or pensions upon dismissal of
  an employee or upon termination of employment in certain other
  circumstances.  The following
  principal plans relate to employee rights upon retirement, as applicable to
  Israeli Group companies :
| |                                                                                                                                                                                                                                                                                                       
| | a.                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                       
| | b.                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                       
| | c.                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                       
| | d.                                                                                                                                                                                                                                                                                                    

| |                               |  | December
  31               |        
| | ----------------------------- |  | --------------------------- | -------
| |                               |  |                             |        
| |                               |  | 2002                        |        
| |                               |  |                             |        
| |                               |  | Adjusted NIS
  in thousands |        
| |                               |  |                             |        
| | Liability
  for severance pay |  |                             | 27,135 
| | L
  e s s - amount funded     |  |                             | (21,403
| |                               |  |                             |        
| |                               |  |                             | 5,732  
| |                               |  |                             |        

The companies may only make withdrawals from the severance pay funds
and insurance policies for the purpose of paying severance pay.

F-43

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10 - EMPLOYEE RIGHTS UPON RETIREMENT
(continued):

|                                                  | e. | The
  severance pay expenses for the years ended December 31, 2001, 2002 and 2003,
  were adjusted NIS 3,987,000, adjusted NIS 3,084,000 and adjusted
  NIS 4,808,000, respectively.              
|------------------------------------------------- | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                  |    |                                                                                                                                                                                                   
|                                                  | f. | Income
  (expenses) from severance pay funds for the years ended December 31, 2001, 2002
  and 2003, were adjusted NIS 271,000, adjusted NIS (983,000) and
  adjusted NIS 1,804,000, respectively.
|                                                  |    |                                                                                                                                                                                                   
|                                                  | g. | The Company
  expects to contribute, in 2004, adjusted NIS 3,664,000 to the insurance
  companies and to the provident fund in respect of its severance pay obligation.                           
|                                                 
|NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES:
|                                                  |    |                                                                                                                                                                                                   
|                                                  | a. | Commitments:                                                                                                                                                                                      
|                                                  |    |                                                                                                                                                                                                   
|                                                  |    | 1)                                                                                                                                                                                                
|                                                  |    |                                                                                                                                                                                                   
|                                                  |    |                                                                                                                                                                                                   
|                                                  |    |                                                                                                                                                                                                   
|                                                  |    | 2)                                                                                                                                                                                                
|                                                  |    |                                                                                                                                                                                                   
|                                                  |    |                                                                                                                                                                                                   

| |                       |  | Adjusted
  NIS
  in thousands |       
| | --------------------- |  | ----------------------------- | ------
| |                       |  |                               |       
| | 2004                  |  |                               | 9,364 
| | 2005                  |  |                               | 5,653 
| | 2006                  |  |                               | 2,632 
| | 2007                  |  |                               | 2,216 
| | 2008
  and thereafter |  |                               | 9,435 
| |                       |  |                               |       
| |                       |  |                               | 29,300
| |                       |  |                               |       

F-44

---

---

| |  |  |  | Rental
  expenses totaled adjusted NIS 5,743,000, adjusted NIS 7,993,000 and
  adjusted NIS 13,849,000 in 2001, 2002 and 2003, respectively.
| |  |  |  | --------------------------------------------------------------------------------------------------------------------------------------------

F-45

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 11 - COMMITMENTS
AND CONTINGENT LIABILITIES (continued):

| |  | 3) | Meissner-Baran
  (a proportionately consolidated company) has entered into an open-ended
  agreement for the provision of supervisory and contracting consulting
  services with another company, which owns shares in Meissner-Baran (hereafter
  the supervising company). This agreement succeeds a prior agreement that
  terminated in July 2000.                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |    | Pursuant to
  the agreement, a representative of the supervising company was appointed to
  be CEO of Meissner-Baran, although the agreement stipulates that no
  employer-employee relationship is to be deemed to exist between
  Meissner-Baran and the CEO.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |    | The
  following payments are also prescribed by the agreement:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |    | a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |    | b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |    | c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | 4) | In 1977,
  within the framework of the acquisition of a production line, machinery,
  patents, trade marks, know-how and technology relating to the production of
  the interrupters keyboards, and piaso-electric products, the Company assumed
  all the sellers obligations and rights with regard to the Chief Scientists
  grants in connection with the above products.  At the end of 1999, all the aforesaid obligations and rights
  were transferred to Baran Technologies. 
  The royalties are payable on sales, up to 100% of the grants received
  (dollar-linked).  The maximum amount
  of royalties that might have to be paid by Baran Technologies, in settlement
  of this, amounts to adjusted NIS 156,000 as of December 31, 2003.
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |    | In case of
  failure of a project that was partly financed by royalty-bearing Government
  participations, the subsidiary is not obliged to pay any such royalties to
  the Israeli Government.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |    | Royalty
  expenses totaled adjusted NIS 187,399, adjusted NIS 303,174 and
  adjusted NIS 268,157 in 2001, 2002 and 2003, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | 5) | Within the
  framework of the acquisition of 50% of the shares of Nes-Pan, a subsidiary
  undertook to grant loans to fund Nes-Pans operations, under the same terms
  and conditions as the other shareholders of Nes-Pan.  In January 2000, the aforesaid loans were converted
  into unlinked, non-interest bearing capital notes.                                                                                                                                                                                                                                                                                                                                                                                                                    

F-46

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE
11 - COMMITMENTS AND CONTINGENT LIABILITIES (continued):

| |  | 6) | Within the
  framework of the acquisition of 50% of the shares of A.R  A.D.I.R.
  Construction Ltd. (hereafter  A.R - A.D.I.R.), the Company undertook to
  provide funds to A.R -A.D.I.R., jointly with the other shareholders, as
  required from time to time.  The
  acquisition agreement also provided that the other shareholders (who own the
  remaining 50% of the shares of A.R - A.D.I.R.) would be entitled to bonuses
  and that the annual profits, net of the above-mentioned bonuses, would be
  distributed equally between the Company and the other shareholders, as
  management fees. 
| |  | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | 7) | Royalty
  commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |    | A subsidiary
  - Baran Technologies- is committed to pay royalties to the Government of
  Israel on proceeds from the sale of products in the development of which the
  Government participated by way of grants. 
  At the time the participations were received, successful development
  of the related projects was not assured. 
  Under the terms of the aforesaid participation, royalties of 3% are
  payable to the Government on the sale of products in the development of which
  the Government participated, up to 100% of the amount of the grants received
  by the subsidiary (dollar linked).
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |    | The maximum
  amount of royalties that might have to be paid by Baran Technologies, in
  settlement of this, amounts to adjusted NIS 3,274,000 ($747,715) as of
  December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | 8) | In December
  1999, a proportionately consolidated company signed an agreement with a third
  party, pursuant to which it is intended that the proportionately consolidated
  company is to construct an office building of 24,000 sqm. for a
  pre-determined consideration.  As of
  December 31, 2003, approximately 10,400 sqm. have been constructed, of which
  5,840 sqm. are leased to the Company, subsidiaries and proportionately
  consolidated companies.                                                                                                                                          
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |    | In June
  2000, the proportionately consolidated company signed an agreement with a
  subsidiary, whereby the subsidiary is to manage, plan and carry out this
  construction project.  The project
  will be charged at cost plus 12%.                                                                                                                                                                                                                                                                                                                                                                         
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | 9) | In October
  1999, Baran Technologies entered into a 6-year agreement with a German
  company.  This agreement grants the
  German company certain rights for the distribution of piaso-electric buttons
  and keys.  Pursuant to this agreement,
  during the first year of the agreement, the German company will act as sole
  distributor and marketer of the above products in all German-speaking
  European countries (hereafter  the territory), and Baran Technologies has given an undertaking not to directly
  carry out any selling activities in the territory.                                

F-47

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE
11 - COMMITMENTS AND CONTINGENT LIABILITIES (continued):

|                                                                                                                                                                                                                                                                                                              |  | 10) | On August
  20, 2000, Meissner-Baran, together with the Company and another company that
  is one of Meissner-Barans related parties, signed a contract with Tower
  Semiconductor Ltd.  The contract,
  which is valid for two years, is for the planning and construction of a new
  semiconductor plant, for consideration of $ 102 million (adjusted NIS 442 million) (the Companys share). The contract is on a
  fast-track turnkey basis and has three stages that will be performed based on
  the clients decision: Stage 1 - planning and receiving building
  permits.  Stage 2 - planning and
  construction of the new factory. 
  Stage 3 - completing the project for the factory.                                                                                                                                                               
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                              |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                              |  |     | As of
  December 31, 2002, Stages 1 and 2 had been completed.  As for Stage 3, amounting to $ 16.6 million
  (the Companys share), Meissner-Baran has completed 26% of stage 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                              |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                              |  |     | On
  March 12, 2003, Meissner-Baran and Tower Semiconductor Ltd. signed an
  addendum to the contract for carrying out a Stage 2 project in Towers FAB-2
  factory in Migdal HaEmek (hereafter - Stage 2 Project), which is effective
  as from its signing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                              |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                              |  |     | On February
  19, 2003, the agreement with Tower was amended, stipulating, among other
  things, that Stage 3 would be executed in five subsequent sub-phases, which
  would go into effect based on the decisions of Tower.  The proceeds of all five sub-phases total
  $ 16.6 million (the Companys share). 
  As of December 31, 2003, Meissner-Baran is in the process of executing
  the second sub-phase.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                              |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                              |  | 11) | A joint
  venture of the Company is engaged in a long-term project for the construction
  of a military base with an area of some 395 acres, at a cost of $ 42
  million.  If the joint venture fails
  to meet the predetermined schedules, it will be required to compensate the
  customer at the rate of $ 7,000 (the Companys share) per day of delay.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                             
|Due to
  severe and extensive damage discovered in October 2003 in part of the
  materials used to construct the project, the USACE rejected this
  material.  Accordingly, the joint
  venture recorded an accrual for additional costs of the project of approximately
  NIS 298,000 (the Companys share).
|                                                                                                                                                                                                                                                                                                              |  | 12) | In
  connection with the project and based on the provisions of the agreement
  between the joint venture of the Company and the USACE (hereafter  the
  Agreement), the joint venture furnished an insurance company with a letter
  of guaranty for the performance of the project in the amount of
  $ 6,204,000.  The letter of guaranty
  shall be in force until the project is finally accepted by the USACE.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                              |  |    
|                                                                                                                                                                                                                                                                                                              |  | 13) | On August
  19, 2002, it was announced that a consortium of companies, which included
  IONICS INC., Dor Chemicals Ltd. and the Company, had been awarded the tender
  issued by the State of Israel for the construction of a desalination plant 
  see also note 2c(2). The execution of the transfer of the rights in the
  tender is subject to approval from the State of Israel. In April 2004 the
  State Of Israel claims that the termination is due to Carmel Desalination
  Ltd.s breach of obligations contained in the Agreement, including CDLs
  failure to execute financing agreements. The Bond was forfeited on May 2nd,
  2004. Barans legal counsels are of the opinion that CDL has good legal
  arguments against WDA. The estimated costs of the project to date, which were
  recorded in the financial statements, are NIS 5 million.

F-48

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE
11 - COMMITMENTS AND CONTINGENT LIABILITIES
(continued):

| |    | 14)                                                                                                               | A consortium
  composed, in equal parts, of Baran Engineering and Projects and Mekorot - The
  Water Company Ltd. (the Israeli national water company), was exclusively
  awarded the tender for the construction of a water desalination facility in
  Ashdod, Israel.  The project will be
  erected on a turnkey basis and its construction cost is approximately $ 95
  million (the Companys share).  The
  construction of the project shall be completed within approximately two
  years.  Because of difficulties and
  various problems as a result of structural changes in Mekorot , the project
  is suspended for the time being.                                                                                                                                                                                                                                                                                                                                     
| | -- | ----------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | 15)                                                                                                               | Baran
  Engineering and Projects is performing an engineering design and permitting
  issuance process of the natural gas transportation system project in Israel,
  which was initiated in 2003 and will continue during 2004.  The overall scope of the project is
  approximately $ 3.5 million.  The above
  company has completed 28% of this project.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                  
| | b. | Contingent liabilities:                                                                                          
| |    |                                                                                                                  
| |    | As of
  December 31, 2003, the Group and its investee companies are parties to the
  legal claims detailed below:
| |    |                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | 1)                                                                                                                | In 2001, a
  claim for NIS 5,440,000 was filed against Baran Raviv by way of a
  summary procedure.  The claimant
  alleges that Baran Raviv has a debt in respect of equipment supplied by the
  claimant.  Baran Raviv has filed an
  application for leave to defend, in which it rejects the claimants
  claims.  In addition, on
  January 1, 2003, Baran Raviv submitted its summations in connection with
  the application for leave to defend. 
  Deliberations have not yet been scheduled.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | 2)                                                                                                                | On
  May 2, 2002, a claim was filed with the Tel-Aviv District Court against
  a proportionately consolidated company - Meissner-Baran - in which the
  Company has a 46.5% equity interest. 
  The claim is for Meissner-Baran and 4 other parties to pay a customer
  approximately NIS 4 million in respect of a damage allegedly caused
  during the installation of an appliance on April 22, 1999.  At this stage, Meissner-Baran has filed a
  statement of defense.  Meissner-Baran
  has an insurance coverage ceiling of approximately $ 0.5 million (adjusted NIS
  2,036,000) in respect of all claims for any particular year.  Based on the opinion of its legal counsel,
  Meissner-Barans management estimates that the likelihood of it being
  required to pay an amount in excess of the insurance coverage of $ 0.5 million
  is remote.  Therefore, no provision
  has been included in the financial statements in respect of this claim.                     
| |    |                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | 3)                                                                                                                | On
  December 19, 2002, another claim was filed against Meissner-Baran, for
  Meissner-Baran to pay a supplier NIS 2.4 million in respect of an alleged
  debt of Meissner-Baran to the supplier in connection with work performed by
  the supplier for the Company.  In
  addition, on said date, the supplier requested the Court, ex parte, to issue
  a provisional attachment order against the properties of Meissner-Baran, up
  to an amount of NIS 4.5 million. 
  The Court has granted the suppliers request and issued an order as
  above.  On December 25, 2002,
  Meissner-Baran applied to the Court to replace the attachment with a bank
  guarantee.  On December 29, 2002,
  the Court granted this request and canceled the provisional attachment order,
  in exchange for a bank guarantee in the amount of NIS 2 million.  On June 30, 2003, a letter of defense and
  a counter-claim in the amount of NIS 292,000 were filed on behalf of Meissner-Baran.

F-49

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE
11 - COMMITMENTS AND
CONTINGENT LIABILITIES (continued):

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |    | Based on the
  facts presented by MeissnerBaran, MeissnerBarans legal counsel estimates
  that it is probable that a loss will be incurred with respect to such
  matters.  Therefore, no provision has
  been included in the financial statements in respect of this claim.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 4) | On
  July 12, 2002, a claim was filed against a subsidiary in the United
  States for an amount of $ 3 million (adjusted NIS 13 million) in respect of a
  debt to the sellers in connection with an agreement for the acquisition of a
  subsidiary.  The Company has included
  a provision in its accounts in respect of this claim, which, based on the
  advice of legal counsel, is the amount of the probable and reasonably
  estimatable loss with regard to this claim.                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 5) | On
  August 6, 2002, another claim was filed against a subsidiary in the
  United States, for an amount of $ 3.3 million (adjusted NIS 14 million) in
  respect of a debt to the sellers in connection with an agreement for the
  acquisition of a subsidiary.  The
  Company has included a provision in its accounts in respect of this claim,
  which, based on the advice of legal counsel, is the amount of the probable
  and reasonably estimatable loss with regard to this claim.                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 6) | Investee
  companies are, in the ordinary course of their business, parties in
  additional legal claims in an aggregate amount of NIS 6,000,000, as well
  as in 10 claims for personal injury filed with the Magistrates Court, in an
  aggregate amount of adjusted NIS 14.5 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 7) | In August
  2003, a subcontractor filed a claim against a joint venture of the Company
  and others in an aggregate amount of NIS 4 million.  In October 2003, the joint venture filed a motion to suspend
  the claim, and filed a counter-claim against the subcontractor.  In September 2003, another subcontractor
  filed a claim against a joint venture of the Company and others in an
  aggregate amount of NIS 3.5 million. 
  In February 2004, the joint venture filed statements of defense
  together with a counter-claim in the amount of NIS 4.6 million.  Based on the opinion of the joint
  ventures legal advisor for these matters, the joint venture has recorded an
  accrual in the amount of NIS 10 million for the probable and reasonably
  estimatable loss with regard to this claim.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Based on the
  advice of legal counsel, the Company has included an amount of NIS 12,464,000
  in respect of the probable and reasonably estimatable amount related to the
  above claims, which include the Companys pro rata share of losses in respect
  of these claims in relation to its equity investees . Baran believes that it
  is not likely that the losses, which it will incur in relating to the claims
  disclosed in Note 11, will materially exceed the amounts disclosed in Note 11
  as the amount of the probable losses provided for. The reduction in the
  provision is, mainly, due to the elapsing of a substantial period of time and
  in view of the prosecutions failure to meet the timetable stipulated by the
  Court in one claim against a subsidiary in the U.S and based on the estimates
  of its legal counsel as to the reduced chances of the claim.

F-50

---

---

BARAN GROUP LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE
12 - SHAREHOLDERS EQUITY:

| | a. | Share capital                                                                                                                                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                             
| |    | The Companys
  shares are traded on the Tel-Aviv Stock Exchange.  On December 31, 2003 the shares were quoted at the price of
  adjusted NIS 32.55 per share (December 31, 2002 - adjusted NIS
  27.40).  As from November 14,
  2002, the shares are listed on the Nasdaq. 
  On December 31, 2003, the shares were quoted at the price of $ 7.41 per
  share (December 31, 2002 - $ 5.7).
| |    |                                                                                                                                                                                                                                                                                                                                                                                             
| |    | The Company
  has 8,375,884 shares issued and outstanding as of December 31, 2002 and
  2003.  The shares include 474,300 and
  219,935 restricted shares as of December 31, 2002 and 2003, respectively,
  which are held by employees and non-employees, and 55,808 and 179,736
  restricted shares as of December 31, 2002 and 2003, respectively, which are
  held by the Company.      
| |    |                                                                                                                                                                                                                                                                                                                                                                                             
| | b. | Shares of the Company held by the Company and its subsidiaries                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                             
| |    | As of
  December 31, 2002 and 2003, the subsidiaries Baran Projects Construction Ltd.
  (Baran Construction) and Baran Industries (91) Ltd. (Baran Industries)
  held 176,608 Company shares, which represented approximately 2.11% of the
  Companys shares at the aforesaid dates. 
  The cost of these shares as of December 31, 2002 and 2003 is
  adjusted NIS 5,649,000.         
| |    |                                                                                                                                                                                                                                                                                                                                                                                             
| |    | As of
  December 31, 2002 and 2003, the number of restricted shares held by the
  Company (as stated above) represented approximately 0.66% and 2.15% of the
  Companys shares, respectively.                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                             
| |    | In
  determining the amount of retained earnings available for distribution as a
  dividend, the Companies Law stipulates that the cost of a companys shares acquired
  by a subsidiary have to be deducted from the amount of retained earnings.                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                             
| | c. | Restricted shares granted to employees and non-employees:                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                             
| |    | The Group
  has granted restricted shares to its employees and non-employees, at their
  par value (1 NIS per share), as follows:                                                                                                                                                                                                                                                           

| |                     |  | Number of
  ordinary shares
  of NIS 1 par value |         | Vesting
  period*    |  | Fair value
  at
  grant date
  (NIS per share) | 
| | ------------------- |  | ------------------------------------------------ | ------- | -------------------- |  | ---------------------------------------------- | 
| |                     |  |                                                  |         |                      |  |                                                | 
| | Grant date          |  | Employees                                        |         | Non-
  employees (a) |  |                                                | 
| |                     |  |                                                  |         |                      |  |                                                | 
| | April 6,
  2000     |  |                                                  | 182,000 | (c)                  |  |                                                | 
| | December 28,
  2000 |  |                                                  | 179,000 | (b)                  |  | 4,000                                          | 
| | August 7,
  2001    |  |                                                  | 50,000  | (d)                  |  |                                                | 
| | November 25,
  2001 |  |                                                  | 130,250 | (b)                  |  | 5,000                                          | 
| | December 31,
  2002 |  |                                                  | 39,800  | (e)                  |  |                                                | 
| | May 29, 2003        |  |                                                  | 3,000   | (f)                  |  |                                                | 

| | * | The period
  over which the optionee must be employed by, or provide services to, the
  Company, at the end of which the restriction on the shares is lifted and the
  shares become ordinary shares of the Company.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-51

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12 - SHAREHOLDERS EQUITY
(continued):

| |    | (a)                                                                                                                                                                                                                                                                                                                                                                                                               | Mainly
  represents Group staff, that are not considered to be employees for accounting
  purposes, since they are not considered employees of the Group for tax
  purposes.                                                                                                       
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                    
| |    | (b)                                                                                                                                                                                                                                                                                                                                                                                                               | The shares
  will vest in four equal batches.  The
  first batch will vest after two years, while the second, third and fourth
  batches will vest after three, four and five
  years, respectively, from the grant date.                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                   | During 2003,
  71,428 forfeited shares were returned to the Company.                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                    
| |    | (c)                                                                                                                                                                                                                                                                                                                                                                                                               | The shares
  will vest in four batches.  The first
  batch of 70,000 shares will vest in April 2002, while the second, third and
  fourth batches of 40,250, 39,000 and 32,750 shares, will vest after three,
  four and five years,
  respectively, from the grant date.          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                   | During 2003,
  22,500 forfeited shares were returned to the Company.                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                    
| |    | (d)                                                                                                                                                                                                                                                                                                                                                                                                               | Granted to
  the Companys CEO                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                   | On January
  1, 2003, the employment of the Companys CEO terminated.  As a result, 25,000 forfeited shares were
  returned to the Company and the other 12,500 shares have been accelerated and
  fully vested.                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                    
| |    | (e)                                                                                                                                                                                                                                                                                                                                                                                                               | 39,000
  shares will vest in four equal batches. 
  The first batch will vest after two years, while the second, third and
  fourth batches will vest after three, four and five years, respectively, from
  the grant date.  The remaining 800
  shares will vest after two years.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                    
| |    | (f)                                                                                                                                                                                                                                                                                                                                                                                                               | All 3,000
  shares will vest in one batch.                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | As December
  31, 2001, 2002 and 2003, the number of unvested restricted shares held by
  Group employees and non-employees is 567,631, 515,469 and 441,055 shares,
  respectively.                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | In addition,
  at the same dates, the weighted number of forfeited shares held by the
  Company is, 95,608, 95,608, and 180,986 shares, respectively.                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | The
  restricted shares, held by the employees and non-employees, have the same
  voting rights and the right to receive dividends, as the Companys ordinary
  shares.                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | d. | The granting
  of shares in accordance with the stock option plan for Israeli employees is
  subject to the terms stipulated by Section 102 of the Income Tax
  Ordinance.  Inter alia, these terms
  provide that the Company will be allowed to claim as an expense for tax
  purposes the amounts credited to the employees as a benefit in respect
  of shares or options granted under the plan, as follows:
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | Through
  December 31, 2003, the amount that the Company will be allowed to claim
  as an expense for tax purposes will be the amount of the benefit chargeable
  to tax in the hands of the employee.                                                                                                                                                                                                           

F-52

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE
12 - SHAREHOLDERS EQUITY (continued):

| |    | From January
  1, 2003 the amount that the Company will be allowed to claim as an expense
  for tax purposes will be the amount of the benefit chargeable to tax as work
  income in the hands of the employee, while that part of the benefit that is
  chargeable to capital gains tax in the hands of the employee will not be
  allowable - all being subject to the restrictions specified in Section 102 of
  the Income Tax Ordinance.  The
  aforementioned expense will be recognized in the tax year that the benefit is
  credited to the employee.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | e. | Employee stock option plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | On February
  27, 2003, the Company in general meeting approved an option plan for
  employees of a subsidiary in the USA, under which senior employees in the USA
  are to be granted options to purchase up to 116,000 ordinary shares of the
  Company, without consideration.  Any
  option not exercised by the end of the exercise period will expire.                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | On December
  1, 2003, options to purchase 74,000 ordinary shares were granted under this
  plan, at an exercise price of NIS 30.64. 
  The vesting period of the options granted is 2 years from the date of
  grant and the rights of the ordinary shares obtained upon exercise of the
  options will be identical to those of the other ordinary shares of the
  Company.  The exercise period of the
  options granted is 3 years from the date of grant.                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | On November
  3, 2003, the Companys Board of Directors approved employee stock option
  plans (hereafter  the plans), whereunder up to 82,000 options are to be
  granted to senior employees of the Company, without consideration.  Under the plans, each option can be
  exercised to purchase one ordinary share of NIS 1 par value of the
  Company.  Immediately upon allotment,
  the ordinary shares purchased, upon exercise of the options, will have the
  same rights as other Company ordinary shares.                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | On December
  22, 2003, 37,500 options were granted under plan 1, at an exercise price of
  NIS 29.79.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | On December
  22, 2003, 37,500 options were granted under plan 2, at an exercise price of
  NIS 29.79, plus $ 5.                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | The vesting
  period of the options granted under the plans is 2-3 years from the date of
  grant and the rights of the ordinary shares obtained upon exercise of the
  options will be identical to those of the other ordinary shares of the
  Company.  The exercise period of the
  options granted is 3-4 years from the date of grant.                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | In addition,
  the Company has undertaken to make a cash payment to the employees  in an
  amount of $ 2 per option - in the event that the share price does not reach a
  certain level during the exercise period and only upon expiration of the
  options (i.e. if the options are not exercised).                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | As of
  December 31, 2003, the options were out-of-the money and the Company,
  accordingly, recorded a provision for the cash payment under the aforesaid
  undertaking, pro rata to the expired portion the lock-up period.  The provision at balance sheet date,
  amounting to adjusted NIS 2,000 is included in the line employees
  under accounts payable and accruals  other                                                                                                                                                                     

F-53

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE
12 - SHAREHOLDERS EQUITY (continued):

| |  | The options
  granted to the Israeli employees are subject to the terms stipulated by
  Section 102 of the Israeli Income Tax Ordinance.  Inter alia, these terms provide that the Company will be
  allowed to claim, as an expense for tax purposes, the amounts credited to the
  employees as a benefit in respect of shares or options granted under the
  plans.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A summary of
  the status of the companys plans as of December 31, 2003, 2002 and 2001and
  changes during the years ended of those dates, is presented below :                                                                                                                                                                                                      

| |                                                                               |  | Year ended
  December 31,2 0 0 3 |        
| | ----------------------------------------------------------------------------- |  | -------------------------------- | -------
| |                                                                               |  |                                  |        
| |                                                                               |  | Number                           |        
| |                                                                               |  |                                  |        
| |                                                                               |  |                                  |        
| |                                                                               |  |                                  |        
| | Options
  outstanding at beginning of year                                    |  |                                  | -,-    
| |                                                                               |  |                                  |        
| | Changes
  during the year -
       options granted                            |  |                                  | 149,000
| |                                                                               |  |                                  |        
| |                                                                               |  |                                  |        
| | Options
  outstanding at end of year                                          |  |                                  | 149,000
| |                                                                               |  |                                  |        
| | Weighted average
  fair value of options granted 
            during the year |  |                                  |        
| |                                                                               |  |                                  |        

| |                                                                                             |  | 2 0 0 3 |       
| | ------------------------------------------------------------------------------------------- |  | ------- | ------
| |                                                                                             |  |         |       
| |                                                                                             |  | Number  |       
| |                                                                                             |  |         |       
| |                                                                                             |  |         |       
| |                                                                                             |  |         |       
| | Options
  granted 
       during the year 
       at the following 
       exercise prices: |  |         |       
| | Below market
  value                                                                        |  |         | 74,000
| |                                                                                             |  |         |       
| | At market
  value                                                                           |  |         | 37,500
| |                                                                                             |  |         |       
| | Above market
  value                                                                        |  |         | 37,500
| |                                                                                             |  |         |       

| |  | The fair value
  of options granted during 2003 was adjusted NIS 1,582,712. The fair value of
  each option granted is estimated on the date of grant using the Black &
  Scholes optionpricing model, with the following weighted average
  assumptions:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          |  |  | 2003  |  
|------------------------- |  |  | ----- | -
|                          |  |  |       |  
|                          |  |  |       |  
|Expected
  volatility     |  |  | 57.25 | %
|Risk free
  interest rate |  |  | 2.2   | %
|Expected
  life in years  |  |  | 2.5   |  

F-54

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12 - SHAREHOLDERS EQUITY
(continued):

| |  | The following
  table presents summarized information relating to the options outstanding at
  December 31, 2003:
| |  | -----------------------------------------------------------------------------------------------------------------

|Options
  outstanding
|---------------------
|                     
|Exerciseprices       
|                     
|NIS                  
|                     
|29.79                
|51.685               
|30.639               
|                     
|29.79-30.639         

| |    | With respect
  to options granted to Israeli employees, the amount that the Company will be
  allowed to claim, as an expense for tax purposes, will be the amount of the
  benefit chargeable to tax as work income in the hands of the employee, while
  that part of the benefit that is chargeable to capital gains tax in the hands
  of the employee shall not be allowable. All are subject to the restrictions
  specified in Section 102 of the Income Tax Ordinance.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | The
  aforementioned expense will be recognized in the tax year that the benefit is
  credited to the employee.                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | f. | Retained
  earnings                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | As
  prescribed by the Companies Law, in determining the amounts available for
  dividend distribution, the amount of Company shares purchased by subsidiaries
  or acquired by the Company are deducted from the balance of retained earnings
  presented under the Companys shareholders equity.                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | In the event
  of the Company declaring cash dividends, such dividends will be paid in
  Israeli currency.  Under current
  Israeli regulations, any cash dividend in Israeli currency, paid in respect
  of ordinary shares purchased by non-residents of Israel with non-Israeli
  currency, may be freely repatriated in such non-Israeli currency, at the rate
  of exchange prevailing at the time of conversion.                                                        

F-55

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 13 -  TAXES ON INCOME:

| | a. | The Company
  and its investee companies:
| | -- | -----------------------------------------
| |    |                                          
| |    | 1)                                       
| |    |                                          
| |    |                                          
| |    |                                          
| |    |                                          
| |    |                                          
| |    |                                          
| |    |                                          

| |  |  | (i)  | One of the
  subsidiaries is exempt from tax on the income from the approved enterprise in
  respect of which the subsidiary has elected the alternative benefits
  track; the length of the exemption period is ten years, and will expire in
  2006.  The benefit period in respect
  of this enterprise has not yet commenced. 
  See also note 1k(3)(a).
| |  |  | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  |      |                                                                                                                                                                                                                                                                                                                                                               
| |  |  |      | In the event
  of distribution of cash dividends out of income, which was tax exempt as
  above, the subsidiary would have to pay tax at the rate of 25% in respect of
  the amount distributed.                                                                                                                                                              
| |  |  |      |                                                                                                                                                                                                                                                                                                                                                               
| |  |  | (ii) | The other
  subsidiary will be liable to corporate tax at the rate of 25%, instead of the
  regular tax rate, for a period of seven years.  See also note 1k(3)(b).                                                                                                                                                                                           

| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | b) | Accelerated
  depreciation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |    | The
  subsidiary is entitled to claim accelerated depreciation for five tax years
  commencing in the first year of operation of each asset, in respect of
  buildings, machinery and equipment used by the approved enterprise.                                                                                                                                                                                                                                                                                                    
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | c) | Conditions
  for entitlement to benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |    | The
  entitlement to the above benefits is conditional upon the subsidiarys
  fulfilling the conditions stipulated by the law, regulations published
  thereunder and the instruments of approval for the specific investments in
  approved enterprises.  In the event of
  failure to comply with these conditions, the benefits may be cancelled and
  the subsidiary may be required to refund the amount of the benefits, in whole
  or in part, with the addition of linkage differences (to the Israeli CPI) and
  interest.

F-56

---

---

BARAN GROUP LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE
13 - TAXES ON INCOME
(continued):

| |  | 2) | 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, its Israeli subsidiaries and
  its Israeli proportionately consolidated companies are taxed under this law.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | 3) | Tax rates
  applicable to income not derived from approved enterprises                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |    | Such income,
  of the Company and its Israeli subsidiaries and proportionately consolidated
  companies not eligible for approved enterprise benefits mentioned in 1a
  above, is taxed at the regular rate of 36%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |    | Foreign
  subsidiaries are taxed on the basis of the tax laws in their country of
  residence.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | 4) | Reform of
  the Israeli tax system                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |    | In 2003, the
  provisions of the Amendment to the Income Tax Ordinance (No. 132), 2002
  (hereafter  the tax reform law) came into effect.  The tax reform law comprehensively reforms certain parts of the
  Israeli tax system.  Certain
  provisions of the tax reform law and anticipated supplementary provisions
  will only be applied from later dates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |    | The Company
  expects that, as a result of the implementation of the tax reform law, it
  will have a gradual reduction in its tax liability due to the fact that a
  significant portion of its income is liable to capital gains tax.  In accordance with the provisions of the
  tax reform law, as from January 1, 2003, capital gains will be taxed at
  a reduced rate of 25%, instead of the regular rate of 36% at which they were
  taxed until the aforementioned date; with regard to the sale of assets
  acquired prior to January 1, 2003, the reduced tax rate will be
  applicable only for the gain allocated to capital gains earned after the
  implementation of the tax reform law, which will be calculated, as prescribed
  by that law.  Furthermore, the tax
  reform law stipulates that carryforward capital losses may be utilized
  against capital gains, without any time restriction (the time limitation for
  the utilization has been removed in respect of capital losses which arose in
  the tax year 1996 and thereafter). 
  The tax reform law also includes an arrangement to allow the set off
  of capital losses from the sale of overseas assets against capital gains in
  Israel.
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | 5) | Carryforward
  tax losses and balance of deduction for inflation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| |                                                         |  | December
  31              |       
| | ------------------------------------------------------- |  | -------------------------- | ------
| |                                                         |  |                            |       
| |                                                         |  | 2002                       |       
| |                                                         |  |                            |       
| |                                                         |  | Adjusted
  NISin thousands |       
| |                                                         |  |                            |       
| | Losses and
  balance of
       deduction for inflation* |  |                            | 59,569
| |                                                         |  |                            |       

F-57

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 13 - TAXES
ON INCOME(continued):

| |    |                        | *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Includes
  balance of carryforward losses of overseas subsidiaries - denoted in foreign
  currency - that amounts to adjusted NIS 62,665,000 as of December 31,
  2003 (December 31, 2002 - NIS 33,751,000).  Under the Israeli inflationary adjustments law, most of the
  carryforward tax losses are linked to the Israeli CPI and can be utilized
  with no expiration date.
| | -- | ---------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                 
| |    | 6)                     | Carryforward
  realized losses on sales of marketable securities at December 31, 2003
  aggregate adjusted NIS 1,444,000; December 31, 2002 - adjusted
  NIS 323,473 (these amounts are excluded from the carryforward tax loss
  balance disclosed in the table in (5) above).  The realized losses are deductible from future realized gains
  from marketable securities, if any. 
  Full valuation allowance has been included in respect of such losses,
  as it is not probable that they will be utilized in the foreseeable future.
| |    |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                        | As of
  December 31, 2002 and 2003, carryforward capital tax losses totaled
  adjusted NIS 1,481,141, and NIS 1,640,000, respectively.  These losses may only be utilized against
  capital gains.  The Company provide a
  full valuation allowance with respect to carryforward tax losses.  Under the inflationary adjustments law,
  tax losses, capital losses and the deduction for inflation carried forward to
  future years are linked to the Israeli CPI.                                                                       
| |    |                       
| | b. | Deferred income taxes:
| |    |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                 
| |    | 1)                     | The
  composition of the deferred taxes is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |                                                                                                      |  | December
  31              |        
| | ---------------------------------------------------------------------------------------------------- |  | -------------------------- | -------
| |                                                                                                      |  |                            |        
| |                                                                                                      |  | 2002                       |        
| |                                                                                                      |  |                            |        
| |                                                                                                      |  | Adjusted
  NISin thousands |        
| |                                                                                                      |  |                            |        
| |                                                                                                      |  |                            |        
| | Depreciable
  fixed assets                                                                           |  |                            | (50    
| | Severance
  pay                                                                                      |  |                            | 1,559  
| | Vacation and
  recreation pay                                                                        |  |                            | 2,177  
| | In respect
  of differences between reporting on 
       accrual basis and cash basis (see f. below) |  |                            | (3,597 
| | In respect
  of carryforward tax losses and 
       deduction for inflation                          |  |                            | 21,445 
| | Other net                                                                                            |  |                            | 159    
| |                                                                                                      |  |                            |        
| |                                                                                                      |  |                            | 21,693 
| | L e s  s - valuation allowance                                                                       |  |                            | (16,497
| |                                                                                                      |  |                            |        
| |                                                                                                      |  |                            | 5,196  
| |                                                                                                      |  |                            |        

F-58

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 13 - TAXES
ON INCOME (continued):

| |  | 2) | Deferred
  taxes are presented in the balance sheets as follows:
| |  | -- | ----------------------------------------------------------------

| |                                                             |  | Consolidated                  |       
| | ----------------------------------------------------------- |  | ----------------------------- | ------
| |                                                             |  |                               |       
| |                                                             |  | December
  31                 |       
| |                                                             |  |                               |       
| |                                                             |  | 2002                          |       
| |                                                             |  |                               |       
| |                                                             |  | Adjusted
  NIS
  in thousands |       
| |                                                             |  |                               |       
| |                                                             |  |                               |       
| | Among
  current assets                                      |  |                               | 7,284 
| | Among
  investments loans and 
       long-term receivables |  |                               | 1,559 
| | Among
  current liabilities                                 |  |                               | (3,597
| | Among
  long-term liabilities                               |  |                               | (50   
| |                                                             |  |                               |       
| | B a l a n c
  e - asset, net *                              |  |                               | 5,196 
| |                                                             |  |                               |       

| |  |  |  | * | Regarding
  companies in Israel, realization of this deferred tax balance is conditional
  upon earning, in the coming years, taxable income in an appropriate amount.
| |  |  |  | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |    |                                                                | The deferred
  taxes are computed mainly at the tax rate of 36%.                     
| | -- | -------------------------------------------------------------- | -------------------------------------------------------------------------------------
| |    |                                                                |                                                                                      
| |    |                                                                | Foreign
  subsidiaries are subject to the tax laws in their countries of
  residence.
| |    |                                                                |                                                                                      
| | c. | Income (losses) before taxes on income is composed as follows:

| |                                                                                                  |  | Consolidated                |        
| | ------------------------------------------------------------------------------------------------ |  | --------------------------- | -------
| |                                                                                                  |  |                             |        
| |                                                                                                  |  | Year ended
  December 31    |        
| |                                                                                                  |  |                             |        
| |                                                                                                  |  | 2001                        |        
| |                                                                                                  |  |                             |        
| |                                                                                                  |  | Adjusted
  NIS in thousands |        
| |                                                                                                  |  |                             |        
| |                                                                                                  |  |                             |        
| | The Company, subsidiaries
  and 
       proportionately consolidated 
       companies in Israel |  |                             | 109,557
| | Subsidiaries and
  proportionately 
       consolidated companies 
       outside Israel         |  |                             | 537    
| |                                                                                                  |  |                             |        
| |                                                                                                  |  |                             | 110,094
| |                                                                                                  |  |                             |        

F-59

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 13 - TAXES
ON INCOME (continued):

| | d. | Taxes on income included in the statements of income:
| | -- | -----------------------------------------------------
| |    |                                                      
| |    | 1)                                                   

| |                                |  | Consolidated                |       
| | ------------------------------ |  | --------------------------- | ------
| |                                |  |                             |       
| |                                |  | Year ended
  December 31    |       
| |                                |  |                             |       
| |                                |  | 2001                        |       
| |                                |  |                             |       
| |                                |  | Adjusted
  NIS in thousands |       
| |                                |  |                             |       
| |                                |  |                             |       
| | Current:                       |  |                             |       
| | In
  Israel                    |  |                             | 41,604
| | Other                          |  |                             | 468   
| |                                |  |                             |       
| |                                |  |                             | 42,072
| | Deferred,
  see 13b above:     |  |                             |       
| | In
  Israel                    |  |                             | 2,186 
| | Other                          |  |                             | 409   
| |                                |  |                             |       
| |                                |  |                             | 2,595 
| |                                |  |                             |       
| |                                |  |                             | 44,667
| | For previous
  years - current |  |                             | (171  
| |                                |  |                             |       
| |                                |  |                             | 44,496
| |                                |  |                             |       

| |  |  | Current
  taxes have been computed at the tax rates of 36% and 25% (mainly 36%) for the
  tax years 2001 -2003.
| |  |  | ---------------------------------------------------------------------------------------------------------------
| |  |  |                                                                                                                
| |  |  | Foreign
  subsidiaries are subject to the tax laws in their countries of
  residence.                          

F-60

---

---

BARAN GROUP LTD. (An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 13- 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 a(3) above),
  and the actual tax expense:
| |  | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                                                                                            |  | Year ended
  December 31    |        
| | ------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | -------
| |                                                                                                                                            |  |                             |        
| |                                                                                                                                            |  | 2001                        |        
| |                                                                                                                                            |  |                             |        
| |                                                                                                                                            |  | Adjusted
  NIS in thousands |        
| |                                                                                                                                            |  |                             |        
| |                                                                                                                                            |  |                             |        
| | Income
  (loss) before taxes on income, as      reported in
  the statements of income (loss)                                              |  |                             | 114,453
| |                                                                                                                                            |  |                             |        
| | Theoretical
  tax expense (benefit)                                                                                                        |  |                             | 41,203 
| | L e s s -
  tax benefits arising from 
       approved enterprise status                                                                   |  |                             | 128    
| |                                                                                                                                            |  |                             |        
| |                                                                                                                                            |  |                             | 41,075 
| | Decrease in
  taxes resulting from 
       different tax rates applicable to 
       foreign subsidiaries                                  |  |                             | (46    
| | Increase in
  valuation allowance                                                                                                          |  |                             | 4,597  
| | Erosion of
  tax payments                                                                                                                  |  |                             |        
| | Increase
  (decrease) in taxes resulting from 
       permanent differences  the tax effect:                                              |  |                             |        
| | Disallowable
  deductions:                                                                                                                 |  |                             |        
| | Goodwill
  impairment                                                                                                                      |  |                             |        
| | Goodwill
  amortization                                                                                                                    |  |                             | 33     
| | Other                                                                                                                                      |  |                             | 1,245  
| | Income
  taxed at special rates                                                                                                            |  |                             |        
| | Decrease
  in taxes resulting from shares 
            issued to
  employees and 
            non-employees                                |  |                             | (2,303 
| | Taxes in
  respect of previous years                                                                                                       |  |                             | (171   
| | Other                                                                                                                                      |  |                             | 66     
| | Decrease in
  taxes in respect of tax 
       losses incurred in the reported 
       year for which deferred taxes     were
  not created |  |                             |        
| |                                                                                                                                            |  |                             |        
| | Taxes on
  income as reported in the 
       statement of income (loss)                                                                    |  |                             | 44,496 
| |                                                                                                                                            |  |                             |        

F-61

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 13 - TAXES
ON INCOME (continued):

|                                              | e. | Tax assessments                                                                                                                                                                                                                                                                                                                                                                                   
|--------------------------------------------- | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                              |    |                                                                                                                                                                                                                                                                                                                                                                                                   
|                                              |    | Some of the
  Group companies have received final assessments through the tax year
  2001.  The Company and some of its
  subsidiaries have received final
  assessments through the tax year 1997. 
  Some of the Group companies have not received final
  tax assessments since their incorporation, although the tax assessments filed
  through the tax year 1997 are considered to be final.
|                                              |    |                                                                                                                                                                                                                                                                                                                                                                                                   
|                                              | f. | Basis of recognizing income for tax purposes                                                                                                                                                                                                                                                                                                                                                      
|                                              |    |                                                                                                                                                                                                                                                                                                                                                                                                   
|                                              |    | The Company
  and its Israeli subsidiaries report for tax purposes on the accruals basis,
  with the exception of the engineering companies, Baran Engineering and Baran
  Infrastructure, which report on the cash basis.                                                                                                                                                                        
|                                             
|NOTE 14 - LINKAGE TERMS OF MONETARY BALANCES:
|                                              |    |                                                                                                                                                                                                                                                                                                                                                                                                   
|                                              | a. | As follows:                                                                                                                                                                                                                                                                                                                                                                                       

|                                                                               |  | D e c e m
  b e r  3 1, 2 0 0 3 |       
|------------------------------------------------------------------------------ |  | ------------------------------- | ------
|                                                                               |  |                                 |       
|                                                                               |  | Linkageto
  euro                |       
|                                                                               |  |                                 |       
|                                                                               |  | Adjusted
  NIS in thousands     |       
|                                                                               |  |                                 |       
|Adjusted NIS :                                                                 |  |                                 |       
|Assets:                                                                        |  |                                 |       
|Current
  assets                                                               |  |                                 | 72,925
|Long-term
  loan and long-term 
            receivables                        |  |                                 |       
|                                                                               |  |                                 |       
|                                                                               |  |                                 | 72,925
|                                                                               |  |                                 |       
|Liabilities:                                                                   |  |                                 |       
|Current
  liabilities                                                          |  |                                 | 78,530
|Long
  term bank loans 
            (including
  current maturities)           |  |                                 | 7,016 
|Other
  long-term liabilities                                                  |  |                                 |       
|Capital
  notes issued to minority 
            shareholders of a
  subsidiary |  |                                 |       
|                                                                               |  |                                 |       
|                                                                               |  |                                 | 85,546
|                                                                               |  |                                 |       

F-62

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 14 - LINKAGE TERMS OF MONETARY BALANCES(continued):

| | b. | Data regarding the Israeli CPI and exchange rate of the U.S. dollar
  and the euro:
| | -- | -----------------------------------------------------------------------------------

| |                               |  | Exchange
  rate
  of one dollar |    | Exchange
  rate of one
  euro |      | Israeli
  CPI* | 
| | ----------------------------- |  | ------------------------------- | -- | ----------------------------- | ---- | -------------- | 
| |                               |  |                                 |    |                               |      |                | 
| |                               |  |                                 |    |                               |      |                | 
| | As of December
  31:          |  |                                 |    |                               |      |                | 
| | 2003                          |  | NIS 4.379                       |    | NIS 5.5331                    |      | Points 99.4    | 
| | 2002                          |  | NIS 4.737                       |    | NIS 4.9696                    |      | Points 101.3   | 
| | 2001                          |  | NIS 4.416                       |    | NIS 3.9075                    |      | Points 95.1    | 
| | 2000                          |  | NIS 4.041                       |    | NIS 3.7628                    |      | Points 93.8    | 
| | Increase
  (decrease) during: |  |                                 |    |                               |      |                | 
| | 2003                          |  | (7.6                            | )% |                               | 11.3 | %              | 
| | 2002                          |  | 7.3                             | %  |                               | 27.2 | %              | 
| | 2001                          |  | 9.3                             | %  |                               | 3.8  | %              | 

| | * | Based on the
  index for the month ending on each balance sheet date, on the basis of 2002
  average = 100.
| | - | -----------------------------------------------------------------------------------------------------------

NOTE
15 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:

| | Balance
  sheets:
| | -----------------

| |    |                                          |  | December
  31                 |       
| | -- | ---------------------------------------- |  | ----------------------------- | ------
| |    |                                          |  |                               |       
| |    |                                          |  | 2002                          |       
| |    |                                          |  |                               |       
| |    |                                          |  | Adjusted
  NIS
  in thousands |       
| |    |                                          |  |                               |       
| | a. | Short-term investments:                  |  |                               |       
| |    | Marketable
  securities:                 |  |                               |       
| |    | Bonds:                                   |  |                               |       
| |    | Government
  bonds                       |  |                               | 49,239
| |    | Corporate
  bonds                        |  |                               | 5,458 
| |    | Mutual
  fund participation certificates |  |                               | 4,263 
| |    | Shares                                   |  |                               | 269   
| |    | Short-term
  bank deposits*              |  |                               | 123   
| |    | Deposit
  in an investment company       |  |                               | 26,876
| |    | Non-marketable options                   |  |                               |       
| |    |                                          |  |                               |       
| |    |                                          |  |                               | 86,228
| |    |                                          |  |                               |       

| | * | The
  deposits, which are for periods of up to one year, are unlinked and bear
  interest at an average rate of 1% per annum.
| | - | -----------------------------------------------------------------------------------------------------------------------------

F-63

---

---

BARAN GROUP LTD. (An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 15 - SUPPLEMENTARY FINANCIAL STATEMENT
INFORMATION (continued):

| |    |                      |                                                      |  | December
  31                 |        
| | -- | -------------------- | ---------------------------------------------------- |  | ----------------------------- | -------
| |    |                      |                                                      |  |                               |        
| |    |                      |                                                      |  | 2002                          |        
| |    |                      |                                                      |  |                               |        
| |    |                      |                                                      |  | Adjusted
  NIS
  in thousands |        
| |    |                      |                                                      |  |                               |        
| | b. | Accounts receivable: |                                                      |  |                               |        
| |    |                      |                                                      |  |                               |        
| |    | 1)                   | Trade and
  income receivable:                       |  |                               |        
| |    |                      | Open
  accounts and checks receivable                |  |                               | 178,953
| |    |                      | L e s s -
  allowance for doubtful accounts          |  |                               | (7,628 
| |    |                      |                                                      |  |                               |        
| |    |                      |                                                      |  |                               | 171,325
| |    |                      | Income
  receivable, net of customer
       advances |  |                               | 85,735 
| |    |                      |                                                      |  |                               |        
| |    |                      |                                                      |  |                               | 257,060
| |    |                      |                                                      |  |                               |        
| |    | 2)                   | Other:                                               |  |                               |        
| |    |                      | Employees                                            |  |                               | 2,327  
| |    |                      | Government
  institutions                            |  |                               | 6,728  
| |    |                      | Proportionately
  consolidated companies*            |  |                               | 4,187  
| |    |                      | Related
  parties*                                   |  |                               | 43     
| |    |                      | Prepaid
  expenses                                   |  |                               | 5,262  
| |    |                      | Deferred
  income taxes, see note 13b                |  |                               | 7,284  
| |    |                      | Income taxes
  refundable                            |  |                               | 5,918  
| |    |                      | Advances to
  suppliers                              |  |                               | 1,544  
| |    |                      | Derivative
  instruments                             |  |                               | 2,439  
| |    |                      | Investment
  designated for sale                     |  |                               | 4,267  
| |    |                      | Sundry                                               |  |                               | 6,597  
| |    |                      |                                                      |  |                               |        
| |    |                      |                                                      |  |                               | 46,594 
| |    |                      |                                                      |  |                               |        

| | * | The balances
  due from proportionately consolidated companies are linked to the Israeli CPI
  and bear interest at the rate of 4% per annum.  The balances due from related parties are unlinked and bear no
  interest.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-64

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 15 - SUPPLEMENTARY FINANCIAL STATEMENT
INFORMATION (continued):

| |    |                                        |                                                                  |  | December
  31                 |        
| | -- | -------------------------------------- | ---------------------------------------------------------------- |  | ----------------------------- | -------
| |    |                                        |                                                                  |  |                               |        
| |    |                                        |                                                                  |  | 2002                          |        
| |    |                                        |                                                                  |  |                               |        
| |    |                                        |                                                                  |  | Adjusted
  NIS
  in thousands |        
| |    |                                        |                                                                  |  |                               |        
| | c. | Inventories:                           |                                                                  |  |                               |        
| |    |                                        |                                                                  |  |                               |        
| |    | Raw
  materials and supplies           |                                                                  |  | 5,749                         |        
| |    | Products
  in process                  |                                                                  |  | 464                           |        
| |    | Finished
  products                    |                                                                  |  | 2,972                         |        
| |    |                                        |                                                                  |  |                               |        
| |    |                                        |                                                                  |  |                               | 9,185  
| |    |                                        |                                                                  |  |                               |        
| |    |                                        |                                                                  |  |                               |        
| | d. | Short-term bank credit and bank loans: |                                                                  |  |                               |        
| |    | 1)                                     | Composed as
  follows:                                           |  |                               |        
| |    |                                        | Short-term
  bank credit*                                        |  |                               | 17,422 
| |    |                                        | Short-term
  bank loans                                          |  |                               | 55,829 
| |    |                                        | Current
  maturities of long-term bank 
       loans, see note 8 |  |                               | 25,892 
| |    |                                        |                                                                  |  |                               |        
| |    |                                        |                                                                  |  |                               | 99,143 
| |    |                                        |                                                                  |  |                               |        
| |    |                                        | Unutilized
  credit facilities                                   |  |                               | 542,826
| |    |                                        |                                                                  |  |                               |        

| | * | The Company
  has provided guarantees to a certain subsidiary and joint venture in the
  amount of adjusted NIS 7,776,000.
| | - | --------------------------------------------------------------------------------------------------------------------------

| |  | 2) | Classified
  by currency, linkage terms and interest rates, the short-term bank credit and
  bank loans (excluding current maturities of long-term loans) are as follows:
| |  | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                |  | Weighted
  interest rates at December 31,
  2003 |               |                               |       
| | ---------------------------------------------- |  | ------------------------------------------------ | ------------- | ----------------------------- | ------
| |                                                |  |                                                  | December
  31 |                              
| |                                                |  |                                                  |               |                              
| |                                                |  |                                                  | 2002          |                               | 2003  
| |                                                |  |                                                  |               |                               |       
| |                                                |  | %                                                |               | Adjusted
  NIS
  in thousands |       
| |                                                |  |                                                  |               |                               |       
| |                                                |  |                                                  |               |                               |       
| | In, or
  linked to, foreign 
       currencies |  | 2.59-3.43                                        |               |                               | 58,232
| | Linked to
  the Israeli CPI                    |  | 6.18                                             |               |                               | 6,480 
| | Unlinked                                       |  | 6-7                                              |               |                               | 8,539 
| |                                                |  |                                                  |               |                               |       
| |                                                |  |                                                  |               |                               | 73,251
| |                                                |  |                                                  |               |                               |       

F-65

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 15 - SUPPLEMENTARY FINANCIAL STATEMENT
INFORMATION (continued):

| |    |                                        |  |  | December
  31               | 
| | -- | -------------------------------------- |  |  | --------------------------- | 
| |    |                                        |  |  |                             | 
| |    |                                        |  |  | 2002                        | 
| |    |                                        |  |  |                             | 
| |    |                                        |  |  | Adjusted
  NIS in thousands | 
| |    |                                        |  |  |                             | 
| | e. | Accounts payable and accruals - other: |  |  |                             | 
| |    | Government
  institutions              |  |  | 25,550                      | 
| |    | Provision
  for vacation pay           |  |  | 6,791                       | 
| |    | Accrued
  expenses                     |  |  | 81,022                      | 
| |    | Employees                              |  |  | 6,856                       | 
| |    | Income
  taxes payable                 |  |  | 5,715                       | 
| |    | Related
  parties                      |  |  | 5,199                       | 
| |    | Warranty
  provision**                 |  |  | 10,758                      | 
| |    | Customer
  advances*                   |  |  | 2,572                       | 
| |    | Deferred
  income taxes, see note 13b  |  |  | 3,597                       | 
| |    | Income
  received in advance           |  |  | 480                         | 
| |    | Sundry                                 |  |  | 7,137                       | 
| |    |                                        |  |  |                             | 
| |    |                                        |  |  | 155,677                     | 
| |    |                                        |  |  |                             | 

| | *  | Customer
  advances as of December 31, 2002 and 2003 are presented net of work in
  progress amounting to adjusted NIS 16,314,000 and adjusted NIS
  7,361,000, respectively.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                              
| | ** | Movements in
  the warranty provision during the year:                                                                                                                       

| |                                                                   |  | Adjusted
  NIS
  in thousands |       
| | ----------------------------------------------------------------- |  | ----------------------------- | ------
| |                                                                   |  |                               |       
| |                                                                   |  |                               |       
| | Balance at
  January 1, 2002                                      |  |                               | 21,182
| | Payments
  made under the warranty                                |  |                               | (3,362
| | Provisions
  created                                              |  |                               | 1,804 
| | Change in
  accrual in respect of pre-existing 
       warranties |  |                               | (8,866
| |                                                                   |  |                               |       
| | Balance at
  December 31, 2002                                    |  |                               | 10,758
| | Payments
  made under the warranty                                |  |                               | (414  
| | Provisions
  created                                              |  |                               | 1,266 
| | Change in
  accrual in respect of pre-existing 
       warranties |  |                               | (8,084
| |                                                                   |  |                               |       
| | Balance at
  December 31, 2003                                    |  |                               | 3,526 
| |                                                                   |  |                               |       

F-66

---

---

BARAN GROUP LTD. (An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 15 - SUPPLEMENTARY FINANCIAL STATEMENT
INFORMATION (continued):

| | Statements of income (loss):
| | ----------------------------

| |    |                   |                                                                |  | Year ended
  December 31    |        
| | -- | ----------------- | -------------------------------------------------------------- |  | --------------------------- | -------
| |    |                   |                                                                |  |                             |        
| |    |                   |                                                                |  | 2001                        |        
| |    |                   |                                                                |  |                             |        
| |    |                   |                                                                |  | Adjusted
  NIS in thousands |        
| |    |                   |                                                                |  |                             |        
| | f. | Cost of revenues: |                                                                |  |                             |        
| |    |                   |                                                                |  |                             |        
| |    | 1)                | Construction
  projects and services:                          |  |                             |        
| |    |                   | Materials
  consumed                                           |  |                             | 124,323
| |    |                   | Salaries                                                       |  |                             | 155,709
| |    |                   | Subcontractors                                                 |  |                             | 387,074
| |    |                   | Manufacturing
  and operating costs                            |  |                             | 73,246 
| |    |                   | Depreciation
  and amortization                                |  |                             | 5,876  
| |    |                   |                                                                |  |                             |        
| |    |                   |                                                                |  |                             | 746,228
| |    |                   | Decrease
  (increase) in finished 
       products inventory   |  |                             | (4,696 
| |    |                   |                                                                |  |                             |        
| |    |                   |                                                                |  |                             | 741,532
| |    |                   |                                                                |  |                             |        
| |    | 2)                | Sale of
  products:                                            |  |                             |        
| |    |                   | Materials
  consumed                                           |  |                             | 87,293 
| |    |                   | Salaries                                                       |  |                             | 2,844  
| |    |                   | Subcontractors                                                 |  |                             | 2,042  
| |    |                   | Manufacturing
  and operating costs                            |  |                             | 397    
| |    |                   | Depreciation
  and amortization                                |  |                             | 277    
| |    |                   |                                                                |  |                             |        
| |    |                   |                                                                |  |                             | 92,853 
| |    |                   | Decrease
  (increase) in products in 
       process inventory |  |                             | (2,867 
| |    |                   | Decrease
  (increase) in finished 
       products inventory   |  |                             | (546   
| |    |                   |                                                                |  |                             |        
| |    |                   |                                                                |  |                             | (3,413 
| |    |                   |                                                                |  |                             |        
| |    |                   |                                                                |  |                             | 89,440 
| |    |                   |                                                                |  |                             |        
| |    | 3)                | Lease of
  buildings:                                          |  |                             |        
| |    |                   | Salaries                                                       |  |                             |        
| |    |                   | Subcontractors                                                 |  |                             |        
| |    |                   | Manufacturing
  and operating costs                            |  |                             | 10     
| |    |                   | Depreciation
  and amortization                                |  |                             | 1,550  
| |    |                   |                                                                |  |                             |        
| |    |                   |                                                                |  |                             | 1,560  
| |    |                   |                                                                |  |                             |        

F-67

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 15 - SUPPLEMENTARY FINANCIAL STATEMENT
INFORMATION (continued):

| |    |                                      |                                                                                               |  | Year ended
  December 31    |       
| | -- | ------------------------------------ | --------------------------------------------------------------------------------------------- |  | --------------------------- | ------
| |    |                                      |                                                                                               |  |                             |       
| |    |                                      |                                                                                               |  | 2001                        |       
| |    |                                      |                                                                                               |  |                             |       
| |    |                                      |                                                                                               |  | Adjusted
  NIS in thousands |       
| |    |                                      |                                                                                               |  |                             |       
| | g. | Selling and marketing expenses, net: |                                                                                               |  |                             |       
| |    |                                      |                                                                                               |  |                             |       
| |    |                                      | Payroll and
  related expenses                                                                |  |                             | 2,703 
| |    |                                      | Advertising
  and sales promotion expenses                                                    |  |                             | 2,647 
| |    |                                      | Depreciation
  and amortization                                                               |  |                             | 197   
| |    |                                      | Other                                                                                         |  |                             | 4,720 
| |    |                                      | L e s s -
  government participations in 
       marketing expenses                           |  |                             | (783  
| |    |                                      |                                                                                               |  |                             |       
| |    |                                      |                                                                                               |  |                             | 9,484 
| |    |                                      |                                                                                               |  |                             |       
| | h. | General and administrative expenses: |                                                                                               |  |                             |       
| |    |                                      |                                                                                               |  |                             |       
| |    |                                      | Payroll and
  related expenses                                                                |  |                             | 21,354
| |    |                                      | Vehicle
  expenses                                                                            |  |                             | 1,514 
| |    |                                      | Rentals and
  office maintenance                                                              |  |                             | 8,710 
| |    |                                      | Office
  supplies, postage and telephone                                                      |  |                             | 6,119 
| |    |                                      | Professional
  fees                                                                           |  |                             | 2,632 
| |    |                                      | Traveling                                                                                     |  |                             | 1,236 
| |    |                                      | Allowance
  for doubtful accounts and bad 
       debts                                       |  |                             | (12   
| |    |                                      | Depreciation
  and amortization                                                               |  |                             | 3,122 
| |    |                                      | Other                                                                                         |  |                             | 14,387
| |    |                                      |                                                                                               |  |                             |       
| |    |                                      |                                                                                               |  |                             | 59,062
| |    |                                      |                                                                                               |  |                             |       
| | i. | Financial income (expenses), net:    |                                                                                               |  |                             |       
| |    |                                      |                                                                                               |  |                             |       
| |    |                                      | In respect
  of marketable securities                                                         |  |                             | 632   
| |    |                                      | In respect
  of deposits and loans granted                                                    |  |                             | 14,864
| |    |                                      | In respect
  of short-term bank credit 
       and bank loans                                 |  |                             | (5,353
| |    |                                      | In respect
  of long-term loans                                                               |  |                             | (3,270
| |    |                                      | Other -
  primarily erosion of monetary 
       items, net                                    |  |                             | 538   
| |    |                                      |                                                                                               |  |                             |       
| |    |                                      |                                                                                               |  |                             | 7,411 
| |    |                                      | Borrowing
  costs capitalized to (reversed 
       from) cost of land and buildings for lease |  |                             | 405   
| |    |                                      |                                                                                               |  |                             |       
| |    |                                      |                                                                                               |  |                             | 7,816 
| |    |                                      |                                                                                               |  |                             |       

F-68

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 15 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION(continued):

| |    |                                                                        |                                                                                      | Year ended December 31    |    
| | -- | ---------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------- | ---
| |    |                                                                        |                                                                                      |                           |    
| |    |                                                                        |                                                                                      | 2001                      |    
| |    |                                                                        |                                                                                      |                           |    
| |    |                                                                        |                                                                                      | Adjusted NIS in thousands |    
| |    |                                                                        |                                                                                      |                           |    
| | j. | Other
  income (expenses), net:                                        |                                                                                      |                           |    
| |    |                                                                        | Capital gain
  on sale of fixed assets                                               |                           |    
| |    |                                                                        | Capital gain
  on disposal of shares of associated
     company                      |                           |    
| |    |                                                                        | Capital loss
  on reduction in percentage of
     shareholding in associated company |                           |    
| |    |                                                                        | Capital loss
  in respect of impairment in
     value of other investments           |                           |    
| |    |                                                                        | Capital gain
  on payable being forgiven                                             |                           |    
| |    |                                                                        | Impairment
  of fixed asset                                                          |                           |    
| |    |                                                                        | Capital gain
  on sale of investment
     designated for sale                        |                           |    
| |    |                                                                        | Other                                                                                |                           |    
| |    |                                                                        |                                                                                      |                           |    
| |    |                                                                        |                                                                                      |                           | 412
| |    |                                                                        |                                                                                      |                           |    
| |    |                                                                        |                                                                                      |                           |    
| | k. | Companys
  share in profits (losses) of associated 
  companies, net: |                                                                                      |                           |    
| |    |                                                                        | Share in
  profits (losses) for the year, net                                        |                           |    
| |    |                                                                        | Amortization
  of goodwill                                                           |                           |    
| |    |                                                                        |                                                                                      |                           |    
| |    |                                                                        |                                                                                      |                           |    
| |    |                                                                        |                                                                                      |                           |    
| |    |                                                                        | Dividend
  received                                                                  |                           |    
| |    |                                                                        |                                                                                      |                           |    

NOTE 16 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:

| | a. | General                                                                                                                                                                                                                                                                                          
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   
| |    | The Company invests
  available cash in low risk instruments. The Company has not entered into any
  hedging transactions with respect to exchange rates related to its current
  projects, because the related income and expenses for the majority of those
  projects are in Israeli currency.
| |    |                                                                                                                                                                                                                                                                                                  
| |    | Foreign Subsidiaries
  typically carry out their activities in the local functional currency, so
  that the revenues from those activities are not exposed to fluctuations in
  exchange rates.                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                  
| | b. | Concentration
  of credit risks                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                  
| |    | Most of the Groups cash
  and cash equivalents at December 31, 2002 and 2003 were deposited with
  Israeli, US and German banks.  The
  Company is of the opinion that the credit risk in respect of these balances
  is remote.                                                                
| |    |                                                                                                                                                                                                                                                                                                  
| |    | Some of the Groups income
  is from major customers (see also note 18c).                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                  
| |    | The Group performs ongoing
  evaluations of its customers and does not generally require collateral.  The accounts include a provision for
  doubtful accounts.                                                                                                                                  

F-69

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 16 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT(continued):

| | c. | Derivatives                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | As stated in note 1n, the
  Group enters into foreign exchange forward contracts in order to protect the
  Group from the risk that the cash flows resulting from purchases of
  inventories will be affected by changes in the exchange rate.  The term of all these contracts is less
  than one year.  As of December 31,
  2002 and 2003 the Group has no such forward contracts outstanding.  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | As described in note 1o,
  the Group enters into future contracts in order to protect itself from
  changes in prices of certain commodities. 
  These future contracts are accounted for as non-hedging
  instruments.  As of December 31,
  2002 and 2003, the Group had future contracts for certain commodities in the
  amount of adjusted NIS 2,439,000 and adjusted 1,720,000, respectively.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                    
| | d. | Fair
  value of financial instruments                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The financial
  instruments of the Group consist mainly of non-derivative assets and
  liabilities (including working capital and long-term loans).                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Due to their nature, the
  fair value of the financial instruments included in working capital is
  usually close or identical to their carrying value.  The fair value of the long-term bank loans also approximates
  the carrying value, since they bear interest at rates close to the prevailing
  market rates.                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The fair value of
  long-term trade receivables (including current maturities) amounts to
  adjusted NIS 13,817,000 using a capitalization rate of 4% (see note 11a(1)).                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The Company does not
  disclose the fair value of capital notes issued to minority shareholders in a
  subsidiary, since it is not practicable to determine their fair value with
  sufficient reliability.                                                                                                                                                                                        

F-70

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 17 - TRANSACTIONS AND BALANCES WITH RELATED PARTIES:

| | a. | Benefits
  to related parties:
| | -- | ------------------------------

| |                                                                                                                                                      |  | Year ended December 31    |       
| | ---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------
| |                                                                                                                                                      |  |                           |       
| |                                                                                                                                                      |  | 2001                      |       
| |                                                                                                                                                      |  |                           |       
| |                                                                                                                                                      |  | Adjusted NIS in thousands |       
| |                                                                                                                                                      |  |                           |       
| |                                                                                                                                                      |  |                           |       
| | Wages and
  salaries paid to related parties employed by
     the Company (6 recipients in 2001, 7 recipients
     in 2002 and 8 recipients in 2003) |  |                           | 2,858 
| | Directors
  fees paid to directors who are not employed
     by the Company (4 recipients in 2001 and 2002
     and 3 recipients in 2003)           |  |                           | 160   
| |                                                                                                                                                      |  |                           |       
| |                                                                                                                                                      |  |                           | 3,018 
| |                                                                                                                                                      |  |                           |       
| | Bonuses (6
  recipients in 2001, 1 recipient in 2002 and
     2 recipients in 2003), see note 11a(9)                                                 |  |                           | 6,389 
| |                                                                                                                                                      |  |                           |       
| |                                                                                                                                                      |  |                           |       
| |                                                                                                                                                      |  | Number of shares          |       
| |                                                                                                                                                      |  |                           |       
| |                                                                                                                                                      |  |                           |       
| | Restricted
  shares granted to an interested 
     party, see note 12c                                                                               |  |                           | 49,057
| |                                                                                                                                                      |  |                           |       

| | b. | Balances
  with related parties:
| | -- | --------------------------------

| |                                                                         |                                   | December
  31                 |      
| | ----------------------------------------------------------------------- | --------------------------------- | ----------------------------- | -----
| |                                                                         |                                   |                               |      
| |                                                                         |                                   | 2002                          |      
| |                                                                         |                                   |                               |      
| |                                                                         |                                   | Adjusted
  NIS
  in thousands |      
| |                                                                         |                                   |                               |      
| |                                                                         |                                   |                               |      
| | Among current assets,
  under other accounts
       receivable:         |                                   |                               |      
| |                                                                         | Balance at balance sheet
  date   |                               |      
| |                                                                         |                                   |                               |      
| |                                                                         | Highest balance during the
  year |                               |      
| |                                                                         |                                   |                               |      
| | Among current liabilities,
  under accounts
       payable and accruals |                                   |                               | 5,199
| |                                                                         |                                   |                               |      

| | c. | Transactions
  with associated companies:                                      
| | -- | -------------------------------------------------------------------------------
| |    |                                                                                
| |    | 1)                                                                             
| |    |                                                                                
| |    | 2)                                                                             
| |    |                                                                                
| | d. | Transactions
  with related parties                                            
| |    |                                                                                
| |    | Rent payments for the year
  ended December 31, 2003 were adjusted NIS 263,000.

F-71

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 18 - BUSINESS AND GEOGRAPHICAL SEGMENTS (continued):

| | a. | Business
  segments:
| | -- | --------------------
| |    |                     
| |    | 1)                  
| |    |                     
| |    |                     
| |    |                     
| |    |                     
| |    |                     
| |    |                     
| |    |                     
| |    | 2)                  
| |    |                     
| |    |                     
| |    |                     
| |    | 3)                  
| |    |                     
| |    |                     
| |    |                     
| |    |                     
| |    |                     
| |    | 4)                  
| |    |                     
| |    |                     
| |    |                     
| |    | 5)                  
| |    |                     
| |    |                     

F-72

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 18 - BUSINESS AND GEOGRAPHICAL SEGMENTS(continued):

| |  | 6) | Business segment
  information for 2003 (adjusted NIS in thousands):
| |  | -- | --------------------------------------------------------------------

|                                                                                          |  | Communications |         | Construction |  | Industry |  | Semi-
  conductors |         | Consulting |  | Marketing and
  recycling of
  food products |  | Technologies |         | Buildings
  for lease |  | Eliminations |  | Total
  consolidated |       
|----------------------------------------------------------------------------------------- |  | -------------- | ------- | ------------ |  | -------- |  | ------------------ | ------- | ---------- |  | -------------------------------------------- |  | ------------ | ------- | --------------------- |  | ------------ |  | -------------------- | ------
|                                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|                                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Income (loss) statement data:                                                             |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Revenues:                                                                                 |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Unaffiliated
  customers                                                                  |  |                | 238,374 |              |  | 53,899   |  |                    | 120,532 |            |  | 12,545                                       |  |              | 61,428  |                       |  | 180,652      |  |                      | 20,617
|Intersegment                                                                              |  |                | 23      |              |  | 82       |  |                    | 2,312   |            |  |                                              |  |              | 12,208  |                       |  |              |  |                      | 271   
|                                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|T o t a l  revenues                                                                       |  |                | 238,397 |              |  | 53,981   |  |                    | 122,844 |            |  | 12,545                                       |  |              | 73,636  |                       |  | 180,652      |  |                      | 20,888
|                                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Segment
  results                                                                         |  |                | (1,771  | )            |  | 4,174    |  |                    | (7,403  | )          |  | 235                                          |  |              | (21,968 | )                     |  | 3,072        |  |                      | (5,040
|                                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Unallocated
  general expenses                                                            |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|                                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Operating
  loss                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Financial
  expenses  net                                                                |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Other
  expenses - net                                                                    |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Taxes
  on income                                                                         |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|                                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Loss
  after taxes on income                                                              |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Share
  in losses of associated        companies, net                                     |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              | (617    | )                     |  |              |  |                      |       
|                                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Minority
  interests in losses        of subsidiaries                                     |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|                                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Net
  loss                                                                                |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|                                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Other data:                                                                               |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Segment
  assets                                                                          |  |                | 228,431 |              |  | 30,959   |  |                    | 63,717  |            |  | 19,204                                       |  |              | 115,468 |                       |  | 44,580       |  |                      | 15,682
|                                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Investment
  in associated
          companies - presented by the
          equity method |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              | 24,181  |                       |  |              |  |                      |       
|                                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Assets
  not allocated between the        segments                                        |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|                                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|T o t a l
  consolidated assets                                                           |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|                                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Segment
  liabilities                                                                     |  |                | 74,437  |              |  | 41,479   |  |                    | 26,440  |            |  | 29,770                                       |  |              | 25,150  |                       |  | 6,915        |  |                      | 5,953 
|                                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|                                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Liabilities
  not allocated between
          the segments                                |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|                                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|T o t a l
  consolidated liabilities                                                      |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|                                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Capital
  expenditure                                                                     |  |                | 3,815   |              |  | 1,081    |  |                    | 1,637   |            |  | 500                                          |  |              | 515     |                       |  | 143          |  |                      | 5,390 
|                                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Depreciation
  and amortization                                                           |  |                | 19,425  |              |  | 600      |  |                    | 2,404   |            |  | 313                                          |  |              | 1,633   |                       |  | 277          |  |                      | 1,141 
|                                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|Impairment                                                                                |  |                | 36,304  |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       
|                                                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |         |                       |  |              |  |                      |       

F-73

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 18 - BUSINESS AND GEOGRAPHICAL SEGMENTS(continued):

| |  | 7) | Business segment
  information for 2002 (adjusted NIS in thousands):
| |  | -- | --------------------------------------------------------------------

|                                                                                         |  | Communications |         | Construction |  | Industry |  | Semi-
  conductors |         | Consulting |  | Marketing and
  recycling of
  food products |  | Technologies |        | Buildingsfor lease |  | Eliminations |  | Total
  consolidated |       
|---------------------------------------------------------------------------------------- |  | -------------- | ------- | ------------ |  | -------- |  | ------------------ | ------- | ---------- |  | -------------------------------------------- |  | ------------ | ------ | ------------------ |  | ------------ |  | -------------------- | ------
|                                                                                         |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|                                                                                         |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|Income statement data:                                                                   |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|Revenues:                                                                                |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|Unaffiliated
  customers                                                                 |  |                | 341,991 |              |  | 46,488   |  |                    | 151,038 |            |  | 114,206                                      |  |              | 57,420 |                    |  | 152,657      |  |                      | 20,130
|Intersegment                                                                             |  |                | 420     |              |  | 2,068    |  |                    | 15,765  |            |  |                                              |  |              | 22,012 |                    |  |              |  |                      | 588   
|                                                                                         |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|T o t a l
  revenues                                                                     |  |                | 342,411 |              |  | 48,556   |  |                    | 166,803 |            |  | 114,206                                      |  |              | 79,432 |                    |  | 152,657      |  |                      | 20,718
|                                                                                         |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|Segment
  results                                                                        |  |                | 27,040  |              |  | 4,688    |  |                    | 6,998   |            |  | 9,930                                        |  |              | 10,624 |                    |  | 2,085        |  |                      | (8,302
|                                                                                         |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|Unallocated
  general expenses                                                           |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|Operating
  income                                                                       |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|Financial
  expenses  net                                                               |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|Other
  income  net                                                                     |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|Taxes
  on income                                                                        |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|                                                                                         |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|Income
  after taxes on income                                                           |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|Share
  in profits of associated        companies                                        |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              | 1,040  |                    |  |              |  |                      |       
|                                                                                         |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|Minority
  interests in losses of        subsidiaries                                    |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|                                                                                         |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|Net
  income                                                                             |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|                                                                                         |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|Other data:                                                                              |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|Segment
  assets                                                                         |  |                | 290,902 |              |  | 28,602   |  |                    | 32,000  |            |  | 47,783                                       |  |              | 80,259 |                    |  | 30,208       |  |                      | 33,108
|                                                                                         |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|Investment
  in associated
          companies - presented by the        equity
  method |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              | 26,818 |                    |  |              |  |                      |       
|                                                                                         |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|Assets
  not allocated between the        segments                                       |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|                                                                                         |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|T o t a l
  consolidated assets                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|                                                                                         |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|Segment
  liabilities                                                                    |  |                | 147,388 |              |  | 15,606   |  |                    | 16,048  |            |  | 37,696                                       |  |              | 25,044 |                    |  | 7,547        |  |                      | 8,369 
|                                                                                         |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|Liabilities
  not allocated between
           the segments                              |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|T o t a l
  consolidated liabilities                                                     |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|                                                                                         |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       
|Capital
  expenditures                                                                   |  |                | 99,950  |              |  | 292      |  |                    | 803     |            |  | 104                                          |  |              | 2,922  |                    |  | 388          |  |                      | 15,054
|Depreciation
  and amortization                                                          |  |                | 10,340  |              |  | 684      |  |                    | 1,672   |            |  | 903                                          |  |              | 1,818  |                    |  | 342          |  |                      | 735   
|                                                                                         |  |                |         |              |  |          |  |                    |         |            |  |                                              |  |              |        |                    |  |              |  |                      |       

F-74

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 18 - BUSINESS AND GEOGRAPHICAL SEGMENTS(continued):

| |  | 8) | Business segment
  information for 2001 (adjusted NIS in thousands):
| |  | -- | --------------------------------------------------------------------

|                                                                                        |  | Communications |         | Construction |  | Industry |  | Semi-
  conductors |         | Consulting |  | Marketing andrecycling offood products |  | Technologies |        | Buildingsfor lease |  | Eliminations |  | Total
  consolidated |       
|--------------------------------------------------------------------------------------- |  | -------------- | ------- | ------------ |  | -------- |  | ------------------ | ------- | ---------- |  | -------------------------------------- |  | ------------ | ------ | ------------------ |  | ------------ |  | -------------------- | ------
|                                                                                        |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|                                                                                        |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|Income statement data:                                                                  |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|Revenues:                                                                               |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|Unaffiliated
  customers                                                                |  |                | 427,355 |              |  | 29,676   |  |                    | 162,985 |            |  | 283,236                                |  |              | 4,339  |                    |  | 86,552       |  |                      | 10,537
|Intersegment                                                                            |  |                | 65      |              |  | 3,423    |  |                    | 12,563  |            |  |                                        |  |              | 23,799 |                    |  |              |  |                      |       
|                                                                                        |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|T o t a l
  revenues                                                                    |  |                | 427,420 |              |  | 33,099   |  |                    | 175,548 |            |  | 283,236                                |  |              | 28,138 |                    |  | 86,552       |  |                      | 10,537
|                                                                                        |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|Segment
  results                                                                       |  |                | 65,351  |              |  | 1,814    |  |                    | 10,368  |            |  | 29,850                                 |  |              | 6,611  |                    |  | 2,762        |  |                      | (7,634
|                                                                                        |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|Unallocated
  general expenses                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|                                                                                        |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|Operating
  income                                                                      |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|Financial
  income - net                                                                |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|Other
  expenses - net                                                                  |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|Taxes
  on income                                                                       |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|                                                                                        |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|Income
  after taxes on income                                                          |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|Share
  in profits of associated
          companies                                    |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              | (3,174 | )                  |  |              |  |                      |       
|                                                                                        |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|Minority
  interests in losses of
          subsidiaries                                |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|                                                                                        |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|Net
  income                                                                            |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|                                                                                        |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|Other data:                                                                             |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|Segment
  assets                                                                        |  |                | 248,792 |              |  | 26,995   |  |                    | 56,166  |            |  | 154,641                                |  |              | 17,931 |                    |  | 39,434       |  |                      | 27,945
|                                                                                        |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|Investments
  in associated
          companies - presented by the        equity method |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              | 26,841 |                    |  |              |  |                      |       
|                                                                                        |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|Assets
  not allocated between
          the segments                                   |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|                                                                                        |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|T o t a l
  consolidated assets                                                         |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|                                                                                        |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|Segment
  liabilities                                                                   |  |                | 180,157 |              |  | 23,665   |  |                    | 30,221  |            |  | 140,000                                |  |              | 45,121 |                    |  | 7,789        |  |                      | 6,211 
|                                                                                        |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|Liabilities
  not allocated between
          the segments                              |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|                                                                                        |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|T o t a l consolidated
                    liabilities                                  |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|                                                                                        |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|Capital
  expenditure                                                                   |  |                | 98,844  |              |  | 1,631    |  |                    | 1,899   |            |  | 3,973                                  |  |              | 2,235  |                    |  | 7            |  |                      | 544   
|                                                                                        |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       
|Depreciation
  and amortization                                                         |  |                | 3,980   |              |  | 936      |  |                    | 1,620   |            |  | 481                                    |  |              | 245    |                    |  | 218          |  |                      | 451   
|                                                                                        |  |                |         |              |  |          |  |                    |         |            |  |                                        |  |              |        |                    |  |              |  |                      |       

F-75

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 18 - BUSINESS AND GEOGRAPHICAL SEGMENTS(continued):

| | b. | Geographical
  segments:
| | -- | ------------------------
| |    |                         
| |    | 1)                      
| |    |                         
| |    |                         

| |        |  | Year ended
  December 31    |          
| | ------ |  | --------------------------- | ---------
| |        |  |                             |          
| |        |  | 2001                        |          
| |        |  |                             |          
| |        |  | Adjusted
  NIS in thousands |          
| |        |  |                             |          
| |        |  |                             |          
| | Israel |  |                             | 921,109  
| | Europe |  |                             | 85,568   
| | U.S.A  |  |                             | 4,289    
| | Other  |  |                             |          
| |        |  |                             |          
| |        |  |                             | 1,010,966
| |        |  |                             |          

| |  | 2) | Assets and additions to
  fixed assets and intangible assets by geographical area                                                                                               
| |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |                                                                                                                                                                                 
| |  |    | Following are data
  reflecting the carrying value of segment assets and additions to fixed assets
  and intangible assets by geographical area in which the assets are located:

| |        |  | Carrying
  value of segment assets |        
| | ------ |  | ---------------------------------- | -------
| |        |  |                                    |        
| |        |  | December
  31                      |        
| |        |  |                                    |        
| |        |  | 2001                               |        
| |        |  |                                    |        
| |        |  | Adjusted
  NIS in thousands        |        
| |        |  |                                    |        
| |        |  |                                    |        
| | Israel |  |                                    | 545,522
| | Europe |  |                                    | 77,377 
| | U.S.A. |  |                                    | 5,394  
| | Other  |  |                                    |        
| |        |  |                                    |        
| |        |  |                                    | 628,293
| |        |  |                                    |        

| |        |  | Additions
  to fixed assets
  and intangible assets |        
| | ------ |  | --------------------------------------------------- | -------
| |        |  |                                                     |        
| |        |  | Year ended
  December 31                            |        
| |        |  |                                                     |        
| |        |  | 2001                                                |        
| |        |  |                                                     |        
| |        |  | Adjusted
  NIS in thousands                         |        
| |        |  |                                                     |        
| |        |  |                                                     |        
| | Israel |  |                                                     | 19,531 
| | U.S.A. |  |                                                     | 89,530 
| | Other  |  |                                                     | 2,291  
| |        |  |                                                     |        
| |        |  |                                                     | 111,352
| |        |  |                                                     |        

F-76

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 18 - BUSINESS AND GEOGRAPHICAL SEGMENTS(continued):

| | c. | Major
  customers                                                                  
| | -- | -----------------------------------------------------------------------------------
| |    |                                                                                    
| |    | Revenues from major customers
  that represent 10% or more of the Groups revenues:

|                                                                                        |  | Year ended
  December 31   |        
|--------------------------------------------------------------------------------------- |  | -------------------------- | -------
|                                                                                        |  |                            |        
|                                                                                        |  | 2001                       |        
|                                                                                        |  |                            |        
|                                                                                        |  | Adjusted
  NISin thousands |        
|                                                                                        |  |                            |        
|                                                                                        |  |                            |        
|Sales to major customers
  that represent more
       than 10% of the Groups turnover: |  |                            |        
|Customer
  A* - communications segment                                                  |  |                            | 274,636
|                                                                                        |  |                            |        
|Customer
  B - semi-conductors segment                                                  |  |                            | 200,952
|                                                                                        |  |                            |        

| |  |  | * | With respect to the
  termination of the agreement in 2002, with Customer A  YES, see note 11a(1).
| |  |  | - | ---------------------------------------------------------------------------------------------------

NOTE 19-LIABILITIES AND GUARANTEES SECURED BY PLEDGES:

| | a. | Specific pledges are
  registered on the vehicles of the Company and of some of the investee
  companies in favor of the leasing company, in accordance with the lease
  agreement.  These vehicles are not
  registered in the names of the companies.                                                                                                                                                                                                          
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | b. | All securities and
  deposits, of whatever type, that are and that shall be placed with certain
  banks and any other placement in respect of and in relation to the securities
  and deposits of the Company and the investee companies, are pledged, under
  specific pledges, in favor of banks. The total amount of deposits and
  securities as of December 31, 2003 is adjusted NIS 65,132,000.                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | c. | Contractual rights in
  respect of real estate in Omer, on which Baran House is located, were pledged
  in favor of a certain bank as security for a loan.  As of balance sheet date, the loan had been fully repaid, and
  the bank lifted the related pledge on March 10, 2004.                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | d. | A first-ranking fixed
  charge and a floating charge in favor of banks are registered on the notes of
  E.O.D. that have been placed with the banks and on all the notes that shall
  be placed with the banks from time to time.                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | e. | To secure its liabilities
  to banks, A.L.D. registered a specific charge on contractual rights relating
  to real estate and a building, a floating
  charge on all its production facilities, property, rights and other assets,
  share capital, goodwill, monies and notes, securities and insurance rights, a
  fixed charge on a bank account and a fixed charge on all the equipment,
  materials and property relating to a certain construction project.

F-77

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 19 - LIABILITIES AND GUARANTEES SECURED BY PLEDGES (continued):

| | f. | To secure its liabilities
  to banks, Nes-Pan registered a fixed charge on all its rights in real
  estate.  The balance as of balance
  sheet date of a liability of Nes-Pan to a bank, which is secured by a pledge,
  is adjusted NIS 53,422,000.  In
  addition, Nes-Pan registered a specific charge on certain amounts receivable,
  in order to secure its liability to a certain bank.                                  
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | g. | To secure its liability to
  a certain banks, E.O.D. registered a fixed charge on its outstanding share
  capital and its goodwill, and a floating charge on its production facilities
  and its remaining assets.  In
  addition, in order to secure its liabilities to the same banks, E.O.D. registered
  a specific charge on its engineering equipment and on the current and future
  insurance rights in respect thereof.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | h. | A.A.B. Joint Venture Nachshonim
  Project pledged all its assets in favor of a bank, in order to secure its
  credit facilities.                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | i. | The balance of the pledged
  bank guarantees of the Company and of certain subsidiaries is adjusted
  NIS 83,232,000 as of December 31, 2003.                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | A US subsidiary has
  registered a pledge on a deposit in the amount of NIS 1,094,750 in favor
  of a letter of credit received from US bank.                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | j. | The Company guarantees the
  loans to its employees granted by the bank. 
  The maximum amount of such guarantees is NIS 330,000 and the balance
  as of December 31, 2003 is NIS 283,500.                                                                                                                                                                                                                                      

|NOTE 20 - | RECONCILIATION
  BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE UNITED
  STATES
|--------- | ------------------------------------------------------------------------------------------------------

| | The Company prepares its financial
  statements in accordance with Israeli GAAP. 
  As applicable to these financial statements, Israeli GAAP vary in
  certain significant respects from U.S. GAAP and as allowed by Item 18 to Form
  20-F, as described below:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                  
| | a.                                                                                                                                                                                                                                                               

F-78

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 - | RECONCILIATION
  BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE UNITED
  STATES(continued):
|--------- | ------------------------------------------------------------------------------------------------------------------

| | b. | The Companys
  reconciliation of net income and shareholders equity between Israeli GAAP
  and U.S. GAAP, pursuant to the reconciliation requirements of Item 18 to Form
  20-F, are as follows:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|   |                                                                                                                                                                                      | Year ended
  December 31               | 
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------- | 
|   |                                                                                                                                                                                      |                                        | 
|   |                                                                                                                                                                                      | 2001                                   | 
|   |                                                                                                                                                                                      |                                        | 
|   |                                                                                                                                                                                      | Adjusted
  NIS                         | 
|   |                                                                                                                                                                                      |                                        | 
|   |                                                                                                                                                                                      | In
  thousands (except per share data) | 
|   |                                                                                                                                                                                      |                                        | 
|1) | Net income (loss):                                                                                                                                                                   |                                        | 
|   | As
  reported in these financial
            statements, under
  Israeli GAAP                                                                                                        |                                        | 
|   | Effect
  of the treatment of the
            following items
  under U.S. GAAP:                                                                                                      |                                        | 
|   | Restricted
  shares granted to Groups employees
                 (see
  j(1) below)                                                                                                 |                                        | 
|   | Options
  granted to Groups employees (see j(2) below)                                                                                                                              |                                        | 
|   | Restricted
  shares and options granted to non-
                 employees
  (see j(3) below)                                                                                        |                                        | 
|   | Goodwill
  amortization (see k below)                                                                                                                                                |                                        | 
|   | Goodwill
  impairment (see k below)                                                                                                                                                  |                                        | 
|   | Derivative
  instruments and embedded derivatives
                 (see
  l below)                                                                                                   |                                        | 
|   | Capital
  notes issued by a subsidiary (see m below)                                                                                                                                 |                                        | 
|   | Inclusion
  of a proportionately consolidated companys
                 data
  of a subsidiary (see n below)                                                                        |                                        | 
|   | Litigation
  settlement with YES (see p below)                                                                                                                                       |                                        | 
|   | Translation
  of subsidiaries financial statements
                 (see
  o below)                                                                                                  |                                        | 
|   | Potential
  dilution in the Companys share holding in
                 associated
  companies as a result of convertible
                 securities
  issued by them (see q below) |                                        | 
|   | Share
  in losses of an associated company (see v below)                                                                                                                             |                                        | 
|   | Tax
  effect on the above U.S. GAAP adjustments                                                                                                                                      |                                        | 
|   | Income
  taxes with respect to:                                                                                                                                                      |                                        | 
|   | Investments
  in associated and proportionately
                      consolidated
  companies (see r(1) below)                                                                      |                                        | 
|   | Benefit
  related to employee and non-employee
                      stock
  based awards (see r(2) below)                                                                           |                                        | 
|   | Guarantees
  (see w below)                                                                                                                                                           |                                        | 
|   | Companys
  share in Israeli - U.S. GAAP differences
                 relating
  to associated companies (see s below)                                                               |                                        | 
|   |                                                                                                                                                                                      |                                        | 
|   | Net income (loss) under
  U.S. GAAP - carried forward                                                                                                                                |                                        | 
|   |                                                                                                                                                                                      |                                        | 

*     Adjusted
retroactively (see v below).

F-79

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 - | RECONCILIATION
  BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE UNITED
  STATES(continued):
|--------- | ------------------------------------------------------------------------------------------------------------------

|                                                      |                                                                                                                                                                                     | Year ended
  December 31               |       
|----------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------- | ------
|                                                      |                                                                                                                                                                                     |                                        |       
|                                                      |                                                                                                                                                                                     | 2001                                   |       
|                                                      |                                                                                                                                                                                     |                                        |       
|                                                      |                                                                                                                                                                                     | Adjusted
  NIS                         |       
|                                                      |                                                                                                                                                                                     |                                        |       
|                                                      |                                                                                                                                                                                     | In
  thousands (except per share data) |       
|                                                      |                                                                                                                                                                                     |                                        |       
|                                                      |                                                                                                                                                                                     |                                        |       
|Net income
  (loss) under U.S. GAAP - brought forward |                                                                                                                                                                                     |                                        | 51,710
|                                                      |                                                                                                                                                                                     |                                        |       
|Other
  comprehensive income (loss):                  |                                                                                                                                                                                     |                                        |       
|                                                      | Differences
  from translation of foreign
     currency financial statements of
     subsidiaries and proportionately
     consolidated company                                     |                                        |       
|                                                      |                                                                                                                                                                                     |                                        |       
|                                                      | Comprehensive
  income (loss) under U.S. GAAP                                                                                                                                       |                                        |       
|                                                      |                                                                                                                                                                                     |                                        |       
|                                                      | Earnings
  (loss) per share - under U.S. GAAP:                                                                                                                                      |                                        |       
|                                                      | Basic                                                                                                                                                                               |                                        |       
|                                                      |                                                                                                                                                                                     |                                        |       
|                                                      | Diluted                                                                                                                                                                             |                                        |       
|                                                      |                                                                                                                                                                                     |                                        |       
|                                                      |                                                                                                                                                                                     |                                        |       
|                                                      |                                                                                                                                                                                     | Number of shares (in thousands)        |       
|                                                      |                                                                                                                                                                                     |                                        |       
|                                                      |                                                                                                                                                                                     |                                        |       
|                                                      | Weighted
  average number of shares
       issued and outstanding - net of
       Company shares held by subsidiaries
       used in computation of basic earnings
       per share |                                        |       
|                                                      | Add:                                                                                                                                                                                |                                        |       
|                                                      | Restricted
  shares, net                                                                                                                                                            |                                        |       
|                                                      |                                                                                                                                                                                     |                                        |       
|                                                      | Weighted
  average number of shares
       used in computation of diluted
       earnings per share                                                                                 |                                        |       
|                                                      |                                                                                                                                                                                     |                                        |       
|                                                      |                                                                                                                                                                                     |                                        |       

F-80

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 - | RECONCILIATION
  BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE UNITED
  STATES(continued):
|--------- | ------------------------------------------------------------------------------------------------------------------

|   |                         | December
  31                                                            |                                                                                                                                                            
|-- | ----------------------- | ------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                         |                                                                          |                                                                                                                                                            
|   |                         | 2002                                                                     |                                                                                                                                                            
|   |                         |                                                                          |                                                                                                                                                            
|   |                         | Adjusted
  NIS                                                           |                                                                                                                                                            
|   |                         |                                                                          |                                                                                                                                                            
|   |                         | In
  thousands                                                           |                                                                                                                                                            
|   |                         |                                                                          |                                                                                                                                                            
|2) | Shareholders
  equity: |                                                                          |                                                                                                                                                            
|   |                         | As reported in
  these financial statements,
       under Israeli GAAP   |                                                                                                                                                            
|   |                         | Effect of
  the treatment of the following
       items under U.S. GAAP: |                                                                                                                                                            
|   |                         |                                                                          | Goodwill
  amortization (see k below)                                                                                                                      
|   |                         |                                                                          | Goodwill
  impairment (see k below)                                                                                                                        
|   |                         |                                                                          | Goodwill
  amount with respect to a subsidiary (see v below)                                                                                               
|   |                         |                                                                          | Issuance of
  shares and capital notes
       by a subsidiary (see m below)                                                                                
|   |                         |                                                                          | Inclusion of
  a proportionately,
       consolidated companys data (see n below)                                                                         
|   |                         |                                                                          | Litigation
  settlement with YES (see p below)                                                                                                             
|   |                         |                                                                          | Goodwill
  translation of consolidated companies
       (see o below)                                                                                      
|   |                         |                                                                          | Potential
  dilution in the Companys shareholding in
       associated company as a result of convertible
  securities
       issued by them (see q below)
|   |                         |                                                                          | Tax effect
  on the above U.S. GAAP adjustments                                                                                                            
|   |                         |                                                                          | Income tax with
  respect to investments
       in associated and proportionately
       consolidated companies (see r(1) below)                           
|   |                         |                                                                          | Tax effect
  related to employee and non-employee
       stock-based awards  (see r(2) below)                                                              
|   |                         |                                                                          | Guarantees
  (see w below)                                                                                                                                 
|   |                         |                                                                          | Companys
  share in Israeli - U.S. GAAP differences
       relating to associated companies (see s below)                                                 
|   |                         |                                                                          |                                                                                                                                                            
|   |                         | Shareholders
  equity under U.S. GAAP                                   |                                                                                                                                                            
|   |                         |                                                                          |                                                                                                                                                            

F-81

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 - | RECONCILIATION
  BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE UNITED
  STATES(continued):
|--------- | ------------------------------------------------------------------------------------------------------------------

| | c. | Proportionate
  consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | Under Israeli GAAP, joint
  ventures and jointly controlled companies are accounted for using the
  proportionate consolidation method. 
  Under U.S. GAAP, investments in joint ventures and in jointly
  controlled companies are accounted for by the equity method.  Proportionate consolidation, however, is
  permitted by the reconciliation requirements of item 18 to Form 20-F,
  provided that the joint ventures or the jointly controlled companies are
  operating entities, the significant financial and operating policies of which
  are, by contractual agreement, jointly controlled by all parties having an
  equity interest in these entities, and provided that summarized financial data are given.  These data are presented in note 2c.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | d. | Earnings
  (loss) per share (EPS)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | Israeli GAAP relating to
  computation of EPS are described in note 1q.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | As applicable to the
  Company, the main difference between Israeli GAAP and U.S. GAAP methods of
  EPS computation is that the Companys restricted non-vested contingent
  returnable shares are taken into account in the computation of basic EPS in
  Israel, whereas in the United States, in computing basic EPS, only the
  weighted average number of the Companys unrestricted shares actually
  outstanding in the reported year is taken into account, and restricted shares
  are included in the computation of diluted EPS.  Another difference is that, under U.S. GAAP, separate
  presentation of basic and diluted EPS is required as long as they are not
  identical, while, under Israeli GAAP, such separate presentation is only
  required if the difference between basic and diluted EPS is in excess of
  5%.  In addition, shares to be issued
  upon exercise of employee stock option are calculated under Israeli GAAP
  based on the full number of outstanding options and imputed interest on the
  assumed proceeds from exercise, rather than the treasury stock method under
  U.S. GAAP. Under Israeli GAAP, such options were not included in the
  computation of EPS, for 2003, since the likelihood of their exercise is not
  probable and their effect on diluted EPS is anti dilutive.  In 2003, under U.S. GAAP, 441,000
  restricted shares and 6 options were not included in computing the diluted loss
  per share since their effect is anti dilutive.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | e. | Reporting
  comprehensive income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | U.S. GAAP requires
  reporting and display of comprehensive income and its components in a full
  set of general purpose financial statements. 
  The purpose of reporting comprehensive income is to report a measure
  of all changes in equity of an enterprise during a period from transactions
  and other events from non-owner sources (i.e. all changes in equity except
  those resulting from investments by owners and distributions to owners).  With respect to the Company, in addition
  to net income, other comprehensive income (loss) represents the differences
  from translation of foreign currency financial statements of subsidiaries and a
  proportionately consolidated company (see also l, n and o below).  Israeli GAAP do not contain such a
  requirement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

F-82

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 - | RECONCILIATION
  BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE UNITED
  STATES(continued):
|--------- | ------------------------------------------------------------------------------------------------------------------

| | f. | Segment
  reporting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | Under Israeli GAAP, as
  noted in note 18, the Company reports segment information based on its
  business segments.  Business
  segment is defined as a distinguishable component of an enterprise that is
  engaged in providing an individual product or service or group of related
  products and services and that is subject to risks and returns that are
  different from those of other business segments.  Accordingly, and as presented in the Companys Israeli GAAP financial statements, the Companys
  business segments, are based on eight business activities which are composed
  of its four operating divisions, plus the separation of its industry division
  into two business segments: industry and semi-conductors, and the separation
  of the technology and services division into four business segments:
  technologies, consulting, marketing and recycling of food products and
  buildings for lease.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | According to U.S. GAAP,
  under FAS 131, segment reporting is based on Operating Segments.  An operating segment is defined as a
  component of an enterprise that engages in business activities, from which it
  may earn revenues and incur expenses, has its operating results regularly
  reviewed by the enterprises chief operating decision maker, and for which
  discrete financial information is available. 
  This concept, the management approach, corresponds with the
  Companys internal reporting. 
  Accordingly, under FAS 131, as of 2003, the Companys operating
  segments are based only on its four operating divisions (hence, industry and
  semi-conductors are considered as one operating segment, and technologies,
  consulting, marketing and recycling of food products and buildings for lease
  are also considered as a single operating segment).                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | g. | Income statement
  presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | Under Israeli GAAP, the
  Company included capital gains on sale of fixed assets and  in 2003 
  impairment of goodwill and fixed assets, under other income (expenses) -
  net, in the consolidated income statements. Also the Company included income
  (expenses) from severance pay funds net of severance pay expanses.  Under U.S. GAAP, Capital gains and
  impairment charges are included under operating income (loss) while income
  (expenses) from severance pay funds are included under financial income
  (expenses).                                                                                                                                                                                                                                                                                                                                                                                              
| |    | Consequently, the
  operating income (loss) under U.S. GAAP would be as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

| |                                                                                                  |  | Year ended
  December 31    |        
| | ------------------------------------------------------------------------------------------------ |  | --------------------------- | -------
| |                                                                                                  |  |                             |        
| |                                                                                                  |  | 2001                        |        
| |                                                                                                  |  |                             |        
| |                                                                                                  |  | Adjusted
  NIS in thousands |        
| |                                                                                                  |  |                             |        
| |                                                                                                  |  |                             |        
| | Operating
  income (loss), as reported
       under Israeli GAAP                                 |  |                             | 106,225
| | Effect of
  (income) expenses from severance pay funds                                           |  |                             | (271   
| | Effect of
  reclassification of capital gains under U.S. GAAP                                    |  |                             | 78     
| | Effect of
  reclassification of impairment of fixed
       assets under U.S. GAAP                |  |                             |        
| | Effect of
  reclassification of impairment of goodwill
       under U.S. GAAP (see also k below) |  |                             |        
| |                                                                                                  |  |                             |        
| | Operating
  income (loss) under U.S. GAAP                                                        |  |                             | 106,032
| |                                                                                                  |  |                             |        

F-83

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 - | RECONCILIATION
  BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE UNITED
  STATES(continued):
|--------- | ------------------------------------------------------------------------------------------------------------------

| | h. | Statements
  of cash flows:
| | -- | ---------------------------
| |    |                            
| |    | 1)                         

|                                                         |  | Year ended
  December 31    |        
|-------------------------------------------------------- |  | --------------------------- | -------
|                                                         |  |                             |        
|                                                         |  | 2001                        |        
|                                                         |  |                             |        
|                                                         |  | Adjusted
  NIS in thousands |        
|                                                         |  |                             |        
|                                                         |  |                             |        
|Net cash provided by (used
  in)    operating activities |  |                             | 152,257
|                                                         |  |                             |        
|Net cash used in investing
  activities                  |  |                             | (34,333
|                                                         |  |                             |        

| |  | 2) | The Company presents its
  cash flow information, under Israeli GAAP, exclusive of the effects of
  inflation.  The information to be
  included under U.S. GAAP, with respect to the effect of inflation on cash and
  cash equivalents, for the years ended December 31, 2001, 2002 and 2003 is
  presented below:
| |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                          |  | 2001                      |         | 2002 |  | 2003     |  
|----------------------------------------------------------------------------------------- |  | ------------------------- | ------- | ---- |  | -------- | -
|                                                                                          |  |                           |         |      |  |          |  
|                                                                                          |  | Adjusted NIS in thousands |        
|                                                                                          |  |                           |        
|                                                                                          |  |                           |        
|Net cash provided by (used
  in) operating activities                                     |  |                           | 193,282 |      |  | (117,589 | )
|Net cash provided by (used
  in) investing activities                                     |  |                           | (34,720 | )    |  | (112,403 | )
|Net cash provided by
  financing activities                                               |  |                           | 2,498   |      |  | 135,548  |  
|Effect of inflation on
  cash and cash equivalents                                        |  |                           | (40,639 | )    |  | (33,970  | )
|                                                                                          |  |                           |         |      |  |          |  
|                                                                                          |  |                           | 120,421 |      |  | (128,414 | )
|                                                                                          |  |                           |         |      |  |          |  
|Translation differences on
  cash balances of
       subsidiaries operating independently |  |                           | (10     | )    |  | 98       |  
|                                                                                          |  |                           |         |      |  |          |  
|Increase (decrease) in
  cash and cash equivalents                                        |  |                           | 120,411 |      |  | (128,316 | )
|                                                                                          |  |                           |         |      |  |          |  
|Balance of cash and cash
  equivalents at beginning
       of year                        |  |                           | 98,177  |      |  | 218,589  |  
|                                                                                          |  |                           |         |      |  |          |  
|Balance of cash and cash
  equivalents at end of year                                     |  |                           | 218,588 |      |  | 90,273   |  
|                                                                                          |  |                           |         |      |  |          |  

F-84

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 - | RECONCILIATION
  BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE UNITED
  STATES(continued):
|--------- | ------------------------------------------------------------------------------------------------------------------

| | i. | Liability
  for employee rights upon retirement, net of amount funded                                                                                                                                                                                                                 
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                       
| |    | Under Israeli GAAP,
  amounts funded with severance pay funds and managerial insurance policies are
  deducted from the related severance pay liability.  In addition, under Israeli GAAP, the income from such funds is
  offset against severance pay expenses.                     
| |    |                                                                                                                                                                                                                                                                                       
| |    | Under U.S. GAAP, the
  amounts funded as above should be presented as a long-term investment
  included among the Companys assets. 
  Also, under U.S. GAAP, income from severance pay funds and severance
  pay expenses are presented at their gross amounts (see also note 10d-g).
| |    |                                                                                                                                                                                                                                                                                       
| | j. | Restricted
  shares and options granted to employees and restricted shares granted to
  non-employees of the Group:                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                       
| |    | 1)                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                       

F-85

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 - | RECONCILIATION
  BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE UNITED
  STATES(continued):
|--------- | ------------------------------------------------------------------------------------------------------------------

| |  | 2) | Options granted to
  employees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |    | Under Israeli GAAP, the
  Company does not recognize any compensation charge for stock options granted
  to employees, other than cash amounts expected to be paid, under certain
  plans, upon expiration of the options (see also note 12e).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |    | Under U.S. GAAP, the Company
  accounts for employee stock-based compensation in accordance with Accounting
  Principles Board Opinion No. 25 - Accounting for Stock Issued to Employees
  (APB 25) and related interpretations. 
  Charge for stock compensation represents the amortization of deferred
  compensation charges, which are based on the aggregate differences between
  the respective exercise price of stock options and purchase price of
  stock.  Stock compensation is
  amortized over the vesting period of the underlying options. For option
  plans, including fixed cash amounts to be paid only upon expiration of the
  options, minimum total compensation costs are equal to those cash amounts.
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |    | Under a fixed plan,
  compensation cost is measured at the grant date and is fixed and not subsequently
  adjusted.  Under a variable plan,
  the measurement date occurs after the grant date and compensation cost is
  estimated and recorded each period from date of grant to the measurement
  date, based on the difference between the option price and the fair market
  value of the stock at the end of each period.                                                                                                                                                                                                                                                                                                
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |    | FAS No. 123 -
  Accounting for Stock-Based Compensation, 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 25.  The
  Company has elected to continue accounting for employee stock option plans according
  to APB 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 FAS No. 123.                                                     

F-86

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 - | RECONCILIATION
  BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE UNITED
  STATES(continued):
|--------- | ------------------------------------------------------------------------------------------------------------------

| |  |  | The following table
  illustrates the effect on net income and earning per share assuming the group
  had applied the fair value recognition provisions of FAS 123 to its
  stock-based employee compensation:
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                 |  | Year ended
  December 31,
  2003                           |        
|---------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------- | -------
|                                                                                                                 |  |                                                            |        
|                                                                                                                 |  | Adjusted NIS
  in thousands,
  except for per
  share data |        
|                                                                                                                 |  |                                                            |        
|                                                                                                                 |  |                                                            |        
|Net loss, as reported                                                                                            |  |                                                            | (76,852
|A d d - stock based employee
  compensation expense,
       included in reported net loss                        |  |                                                            | 2      
|L e s s  stock-based
  employee compensation expense
       determined under fair value method for all
  awards |  |                                                            | (30    
|                                                                                                                 |  |                                                            |        
|Pro forma net loss                                                                                               |  |                                                            | (76,880
|                                                                                                                 |  |                                                            |        
|Earnings per share:                                                                                              |  |                                                            |        
|Basic
  and diluted  as reported                                                                                |  |                                                            | (9.97  
|                                                                                                                 |  |                                                            |        
|Basic
  and diluted  pro forma                                                                                  |  |                                                            | (9.97  
|                                                                                                                 |  |                                                            |        

| |  | 3) | Restricted shares granted
  to non-employees                                                                                                                                                                                                                                                                                                                                
| |  | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |                                                                                                                                                                                                                                                                                                                                                                             
| |  |    | Under Israeli GAAP, the
  Company has not recognized any compensation charge for restricted shares
  granted to non-employees.                                                                                                                                                                                                                                              
| |  |    |                                                                                                                                                                                                                                                                                                                                                                             
| |  |    | Under U.S. GAAP, the
  Company is required to measure compensation expense with respect to such
  awards granted to non-employees based on the fair value model, according to
  the provisions of FAS 123 and EITF 96-18 (Accounting for Equity Instruments
  that are Issued to Other than Employees for Acquiring, or in Conjunction with
  Selling, Goods or Services).
| |  |    |                                                                                                                                                                                                                                                                                                                                                                             
| |  |    | In addition, under Israeli
  GAAP, dividends paid with respect to such restricted shares are credited to
  retained earnings (i.e. identical to the treatment of dividends with respect
  to ordinary shares), while under U.S. GAAP, such dividends are charged to
  income as part of the compensation expenses relating to the awards.                                   
| |  |    |                                                                                                                                                                                                                                                                                                                                                                             
| |  |    | Compensation expenses
  relating to such awards granted to non-employees were adjusted NIS 2,940,000
  (including NIS 2,892,000 relating to related parties), adjusted
  NIS 34,000, and adjusted NIS 52,000 for the years ended December
  31, 2001, 2002 and 2003, respectively.                                                                                          

F-87

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 - | RECONCILIATION
  BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE UNITED
  STATES(continued):
|--------- | ------------------------------------------------------------------------------------------------------------------

| | k. | Accounting
  for goodwill and other intangible assets
| | -- | -----------------------------------------------------
| |    |                                                      
| |    | 1)                                                   
| |    |                                                      
| |    |                                                      
| |    |                                                      
| |    |                                                      
| |    |                                                      
| |    |                                                      
| |    |                                                      
| |    |                                                      
| |    |                                                      
| |    |                                                      

F-88

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 - | RECONCILIATION
  BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE UNITED
  STATES(continued):
|--------- | ------------------------------------------------------------------------------------------------------------------

| |  | 2) | The changes in the
  carrying amounts of goodwill for the year ended December 31, 2003, are as
  follows:
| |  | -- | ---------------------------------------------------------------------------------------------------------

|                                                                                                                          |  | Communications
  segment    |         | Technologysegment |  | Total |       
|------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | ----------------- |  | ----- | ------
|                                                                                                                          |  |                             |         |                   |  |       |       
|                                                                                                                          |  | Adjusted
  NIS in thousands |        
|                                                                                                                          |  |                             |        
|                                                                                                                          |  |                             |        
|Balance as of January 1,
  2002                                                                                           |  |                             | 5,172   |                   |  |       |       
|Additional amount paid,
     carried to goodwill (see
      notes 2a(2)(a), 2a(2)(b) and 2a(3)(b))                        |  |                             | 92,066  |                   |  |       | 2,178 
|Differences from
  translation of
     foreign currency financial
     statements of subsidiaries
     (see also o below) |  |                             | 1,466   |                   |  |       |       
|                                                                                                                          |  |                             |         |                   |  |       |       
|Balance as of December 31,
  2002                                                                                         |  |                             | 98,704  |                   |  |       | 2,178 
|Impairment losses                                                                                                         |  |                             | (39,534 | )                 |  |       | (2,178
|Differences from
  translation of
     foreign currency financial
     statements of subsidiaries
     (see also o below) |  |                             | (4,021  | )                 |  |       |       
|                                                                                                                          |  |                             |         |                   |  |       |       
|Balance as of December 31,
  2003                                                                                         |  |                             | 55,149  |                   |  |       | -,-   
|                                                                                                                          |  |                             |         |                   |  |       |       

| |  | 3) | The following table
  illustrates the Companys adjusted results, under U.S. GAAP, adjusted to
  eliminate the effect of goodwill amortization expense, including goodwill
  with respect to an associated company accounted for by the equity method:
| |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                       |  | Year ended
  December 31    |       
|------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------
|                                                                                                       |  |                             |       
|                                                                                                       |  | 2001                        |       
|                                                                                                       |  |                             |       
|                                                                                                       |  | Adjusted
  NIS in thousands |       
|                                                                                                       |  |                             |       
|                                                                                                       |  |                             |       
|Net income (loss) - under
  U.S. GAAP                                                                  |  |                             | 51,710
|Add back:                                                                                              |  |                             |       
|Goodwill
  amortization                                                                                |  |                             | 66    
|Goodwill
  amortization
            included in share
  of profits
            of associated
  company |  |                             | 373   
|                                                                                                       |  |                             |       
|Net income (loss) under
  U.S. GAAP -
       as adjusted                                               |  |                             | 52,149
|                                                                                                       |  |                             |       

F-89

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 - | RECONCILIATION
  BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE UNITED
  STATES(continued):
|--------- | ------------------------------------------------------------------------------------------------------------------

| |                                                                                          |  | Year ended
  December 31 |     
| | ---------------------------------------------------------------------------------------- |  | ------------------------ | ----
| |                                                                                          |  |                          |     
| |                                                                                          |  | 2001                     |     
| |                                                                                          |  |                          |     
| |                                                                                          |  | Adjusted
  NIS           |     
| |                                                                                          |  |                          |     
| |                                                                                          |  |                          |     
| | Earnings (loss) per share
  - under U.S. GAAP:                                           |  |                          |     
| | Basic
  - as reported                                                                    |  |                          | 7.39
| | Add
  back:                                                                              |  |                          |     
| | Goodwill
  amortization                                                                  |  |                          | 0.01
| | Goodwill
  amortization included in
            share of profits
  of associated company |  |                          | 0.05
| |                                                                                          |  |                          |     
| | Basic - adjusted                                                                         |  |                          | 7.45
| |                                                                                          |  |                          |     
| | Diluted
  - as reported                                                                  |  |                          | 6.84
| | Add
  back:                                                                              |  |                          |     
| | Goodwill
  amortization                                                                  |  |                          | 0.01
| | Goodwill
  amortization included in
            share of profits
  of associated company |  |                          | 0.05
| |                                                                                          |  |                          |     
| | Diluted
  - adjusted                                                                     |  |                          | 6.9 
| |                                                                                          |  |                          |     

| |  | 4) | Estimated amortization
  expenses of other intangible assets (see also note 7), for the years
  following December 31, 2003, are as follows:
| |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------

|                        |  | Adjusted
  NIS
  in thousands |      
|----------------------- |  | ----------------------------- | -----
|                        |  |                               |      
|Year ended December 31: |  |                               |      
|2004                    |  |                               | 1,679
|2005                    |  |                               | 948  

| | L. | Derivative
  instruments and embedded derivatives                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Under U.S. GAAP, the Group
  applied FAS 133 Accounting for Derivative Instruments and Hedging
  Activities, as amended by FAS 137, FAS 138 and FAS 149.  Under the provisions of FAS 133, the
  Groups derivative instruments do not qualify for hedge accounting.                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | In addition, under U.S.
  GAAP, certain contracts contain embedded derivatives instruments. Such
  embedded derivatives are separated under U.S. GAAP from the host contracts
  and accounted for as derivative instruments pursuant to FAS 133 (as amended
  by FAS 137, FAS 138 and FAS 149). 
  Israeli GAAP does not contain such separation and measurement
  requirements.  At December 31, 2003
  and 2002, the Company does not have any embedded derivatives outstanding.

F-90

---

---

BARAN GROUP LTD. (An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 - | RECONCILIATION
  BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE UNITED
  STATES(continued):
|--------- | ------------------------------------------------------------------------------------------------------------------

| | m. | Issuance
  of shares and capital notes by a development stage subsidiary (Mobipower -
  formerly TPS)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Mobipower is mainly financed
  by funds from all of its shareholders, through capital notes. These capital
  notes are linked to the Israeli CPI and bear 4% annual interest.  No repayment date exists with respect to
  such notes.  Under the terms of the
  agreement for the capital notes any repayment of amounts related to the capital
  note arrangements, including adjustments for CPI and interest, requires a
  majority shareholder vote and is required to be paid pro rata to the existing
  shareholders common stock interests at the time of repayment.  Accordingly, repayment of the capital
  notes and any interest thereon, is at the sole discretion of Baran, the majority
  shareholder.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Under Israeli GAAP, total
  proceeds from such issuance were allocated to the shares issued based on the
  par value, while the balance was allocated to the capital notes.  Interest expense was recorded with respect
  to such notes.  Under U.S. GAAP, in
  light of the capital notes terms and conditions, as described above, the
  total proceeds from the issuance of shares and capital notes are reflected as
  minority interests in the Groups consolidated financial statements.  Accordingly, the interest expenses and
  credits to the minority interest recorded under Israeli GAAP must be reversed
  for U.S. GAAP purposes.                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | In addition, under Israeli
  GAAP, the issuance of capital notes in 2003 does not result in any gain
  recognition, since such notes classified as liabilities. Under U.S. GAAP,
  since the capital notes are classified as equity in the subsidiary level, and
  since subsidiary is in development stage, the issuance of the capital
  directly to resulted in gain, credited directly to capital surplus in the
  Groups consolidated financial statements.                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Based on the above,
  hereunder is a table that summarizes the effects of Mobipowers capital notes
  on the Companys consolidated financial statements under Israeli GAAP and
  U.S. GAAP:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

| |                                                                                 |  | Year ended December 31    |      
| | ------------------------------------------------------------------------------- |  | ------------------------- | -----
| |                                                                                 |  |                           |      
| |                                                                                 |  | 2001                      |      
| |                                                                                 |  |                           |      
| |                                                                                 |  | Adjusted NIS in thousands |      
| |                                                                                 |  |                           |      
| |                                                                                 |  |                           |      
| | Income (loss) statement
  data:                                                 |  |                           |      
| | As
  reported under Israeli GAAP:                                               |  |                           |      
| | Financial
  income (expenses), net                                              |  |                           | 7,816
| |                                                                                 |  |                           |      
| | Minority
  interests in losses of
               subsidiaries,
  net            |  |                           | 574  
| |                                                                                 |  |                           |      
| | Under
  U.S. GAAP:                                                              |  |                           |      
| | Financial
  income (expenses), net                                              |  |                           | 8,520
| |                                                                                 |  |                           |      
| | Minority
  interests in losses of
               subsidiaries,
  net            |  |                           | 264  
| |                                                                                 |  |                           |      
| | Difference between Israeli
  and U.S. GAAP:                                     |  |                           |      
| | Increase
  in financial income, net from
          reversal of interest expense |  |                           | 705  
| | Reduction in minority
  interest in losses
     of subsidiaries, net            |  |                           | (310 
| |                                                                                 |  |                           |      
| | Adjustment m reflected
  in U.S. GAAP
     reconciliation                     |  |                           | 395  
| |                                                                                 |  |                           |      

F-91

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 - | RECONCILIATION
  BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE UNITED
  STATES(continued):
|--------- | ------------------------------------------------------------------------------------------------------------------

|                                                                                      |  | Year ended December 31    |        
|------------------------------------------------------------------------------------- |  | ------------------------- | -------
|                                                                                      |  |                           |        
|                                                                                      |  | 2002                      |        
|                                                                                      |  |                           |        
|                                                                                      |  | Adjusted NIS in thousands |        
|                                                                                      |  |                           |        
|                                                                                      |  |                           |        
|Balance sheet data:                                                                   |  |                           |        
|As
  reported under Israeli GAAP:                                                     |  |                           |        
|Capital
  notes issued to minority
               shareholders
  of a subsidiary      |  |                           | 19,069 
|Minoritys
  share in Mobipowers capital
               deficiency                   |  |                           | (8,121 
|                                                                                      |  |                           |        
|Capital
  notes issued to minority
               shareholders
  of a subsidiary, net |  |                           | 10,948 
|                                                                                      |  |                           |        
|Shareholders
  equity:                                                               |  |                           |        
|Capital
  surplus                                                                     |  |                           | 70,835 
|                                                                                      |  |                           |        
|Retained
  earnings                                                                   |  |                           | 162,773
|                                                                                      |  |                           |        
|Under U.S. GAAP:                                                                      |  |                           |        
|Capital notes issued to minority
          shareholders of a subsidiary               |  |                           | -      
|                                                                                      |  |                           |        
|Minoritys
  share in Mobipowers equity
          capital deficiency                 |  |                           | 528    
|                                                                                      |  |                           |        
|Shareholders
  equity:                                                               |  |                           |        
|Capital
  surplus                                                                     |  |                           | 77,256 
|                                                                                      |  |                           |        
|Retained
  earnings                                                                   |  |                           | 163,403
|                                                                                      |  |                           |        
|Difference between Israeli
  and U.S. GAAP in
     shareholders equity:              |  |                           |        
|Adjustment m reflected in U.S.
  GAAP
          adjustments                         |  |                           | 10,425 
|Included
  in tax effect of U.S. GAAP
          adjustments                           |  |                           | (3,373 
|                                                                                      |  |                           |        
|                                                                                      |  |                           | 7,052  
|                                                                                      |  |                           |        

F-92

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 - | RECONCILIATION
  BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE UNITED
  STATES(continued):
|--------- | ------------------------------------------------------------------------------------------------------------------

| | n. | Inclusion
  of data for a proportionately consolidated company (Meissner-Baran)                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                             
| |    | Under Israeli GAAP, the
  financial data of Meissner-Baran, included by the proportionate consolidation
  method in the Companys consolidated financial statements, is based on
  Meissner-Barans financial statements prepared in adjusted
  NIS, under the provisions of Opinion 36 of the Israeli Institute.                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                             
| |    | Under U.S. GAAP, according
  to the provisions of FAS 52, the functional currency of Meissner-Baran is the
  U.S. dollar.  Accordingly, the financial
  data of Meissner-Baran included in the Companys consolidated financial
  statements, for U.S. GAAP purposes, are remeasured from local currency (NIS)
  into its functional currency (U.S. dollar) using historical exchange rates.
| |    |                                                                                                                                                                                                                                                                                                                                                                                             
| |    | Following are data
  pertaining to Meissner-Baran, based upon the Companys holding percentage, as
  presented in the Companys consolidated financial statements and the
  respective remeasured data under U.S. GAAP:                                                                                                                                                                     

|                                  |  | December 31                 |       
|--------------------------------- |  | --------------------------- | ------
|                                  |  |                             |       
|                                  |  | 2002                        |       
|                                  |  |                             |       
|                                  |  | Adjusted NIS
  in thousands |       
|                                  |  |                             |       
|                                  |  |                             |       
|Balance sheet data:               |  |                             |       
|As
  reported under Israeli GAAP: |  |                             |       
|Current
  assets                  |  |                             | 46,925
|Fixed
  assets, net               |  |                             | 970   
|Deferred
  income taxes           |  |                             | 139   
|                                  |  |                             |       
|T o t a l
  assets                |  |                             | 48,034
|                                  |  |                             |       
|Current
  liabilities             |  |                             | 37,295
|Long-term
  liabilities           |  |                             | 388   
|                                  |  |                             |       
|T o t a l
  liabilities           |  |                             | 37,683
|                                  |  |                             |       
|Under
  U.S. GAAP:                |  |                             |       
|Current
  assets                  |  |                             | 46,925
|Fixed
  assets, net               |  |                             | 906   
|Deferred
  income taxes           |  |                             | 897   
|                                  |  |                             |       
|T o t a l
  assets                |  |                             | 48,728
|                                  |  |                             |       
|Current
  liabilities             |  |                             | 37,295
|Long-term
  liabilities           |  |                             | 1,145 
|                                  |  |                             |       
|T o t a l
  liabilities           |  |                             | 38,440
|                                  |  |                             |       
|Shareholders equity:             |  |                             |       
|Israeli
  GAAP                    |  |                             | 10,352
|U.S.
  GAAP                       |  |                             | 10,287
|                                  |  |                             |       
|Adjustment
  (n)                |  |                             | (65   
|                                  |  |                             |       

F-93

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 - | RECONCILIATION
  BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE UNITED
  STATES(continued):
|--------- | ------------------------------------------------------------------------------------------------------------------

|                                                        |  | Year ended
  December 31    |        
|------------------------------------------------------- |  | --------------------------- | -------
|                                                        |  |                             |        
|                                                        |  | 2001                        |        
|                                                        |  |                             |        
|                                                        |  | Adjusted
  NIS in thousands |        
|                                                        |  |                             |        
|Statement of income data:                               |  |                             |        
|As
  reported under Israeli GAAP:                       |  |                             |        
|Total
  revenues                                        |  |                             | 283,130
|                                                        |  |                             |        
|Gross
  profit                                          |  |                             | 39,044 
|                                                        |  |                             |        
|Income
  (loss) before taxes on
                 income |  |                             | 36,344 
|                                                        |  |                             |        
|Net
  income (loss)                                     |  |                             | 23,041 
|                                                        |  |                             |        
|Under
  U.S. GAAP:                                      |  |                             |        
|Total
  revenues                                        |  |                             | 274,690
|                                                        |  |                             |        
|Gross
  profit                                          |  |                             | 40,382 
|                                                        |  |                             |        
|Income
  (loss) before taxes on
                 income |  |                             | 34,649 
|                                                        |  |                             |        
|Net
  income (loss)                                     |  |                             | 21,332 
|                                                        |  |                             |        
|Difference
  between Israeli and                        |  |                             |        
|U.S.
  GAAP                                             |  |                             | (1,709 
|                                                        |  |                             |        
|Adjustment
  n reflected in                           |  |                             |        
|U.S.
  GAAP reconciliation                              |  |                             | (1,709 
|                                                        |  |                             |        

| | o. | Translation
  of subsidiaries financial statements                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Under Israeli GAAP,
  balance sheet and income statement items of investee companies, whose
  functional currency is other than NIS, are translated by using the exchange
  rate at balance sheet date (see also note 1t).  Under U.S. GAAP, balance sheet items are translated using the
  exchange rate at balance sheet date, while income statement items are
  translated using the exchange rate at the dates on which these elements are
  recognized or the weighted average exchange rate for the period.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Goodwill allocated to
  investee companies, whose functional currency is other than NIS, is translated,
  under Israeli GAAP, by using the exchange rate at acquisition date, while
  under U.S. GAAP, goodwill is translated using the exchange rate at each
  balance sheet date.                                                                                                                                                                                                                               

F-94

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 - | RECONCILIATION
  BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE UNITED
  STATES(continued):
|--------- | ------------------------------------------------------------------------------------------------------------------

| | p. | Litigation
  settlement with D.B.S. Satellite Services (1988) Ltd. (YES) (see also
  note 11a(1))                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | As the result of a court
  settlement in February 2002, it was agreed between the Company and YES that
  YES would be required to pay the Company an amount of adjusted
  NIS 57,991,000, in installments through 2004, which was equal to the
  original amount of YES accounts receivable, as recorded by the Company in
  the normal course of business, and which was previously due immediately.  The installments are to be repaid in 2002,
  2003 and 2004, with the addition of linkage differences.                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Under Israeli GAAP, the
  above long-term accounts receivable are recorded at their original amount (on
  an undiscounted basis).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Under U.S. GAAP, in light
  of the above litigation settlement, the Company adjusted its December 31,
  2002 and 2003 accounts receivable, recorded in the normal course of business,
  to their estimated fair value in accordance with APB 21, using a discount
  rate of 4%, resulting in recognition of a discount of NIS 2,598,000 on the
  original accounts receivable and an expense in the same amount.  The Company recognizes this discount in
  income over the repayment period (through December 31, 2004).  The resulting income recorded during the
  years 2002 and 2003 were adjusted NIS 1,432,000 and NIS 872,000,
  respectively.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | q. | Potential
  dilution in the Companys shareholding in associated companies as a result of
  convertible securities issued by them                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | According to Israeli GAAP,
  under the provisions of Opinion 48 of the Israeli Institute, an investor
  company is required to create a provision for losses, which it may incur from
  the dilution of its holding in associated companies, when the likelihood of
  the exercise of the exercisable securities is probable.  Under U.S. GAAP, such loss is recognized
  on the exercise date.                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | r. | Income
  taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | 1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-95

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 | RECONCILIATION
  BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE UNITED
  STATES(continued):
|------- | ------------------------------------------------------------------------------------------------------------------

| |    | 2)                                                                                                                                                                                                  | Tax benefit related to
  employee and non-employee stock-based awards.                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                     | Under Israeli GAAP, the
  tax benefit resulting from the employee and non-employee sale of restricted
  stock is recognized in the statement of income as a reduction of income tax
  expense.  Under U.S. GAAP, the Company
  recognizes deferred tax assets and the related tax benefit for the recorded
  compensation cost that ordinarily results in a future tax deduction.  Any additional benefit actually realized
  is credited directly to capital surplus.
| |    |                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                     | As of December 31, 2002
  and 2003, deferred tax assets recorded in the amount of adjusted NIS 14,238,000
  and adjusted NIS 14,606,000, respectively, exist with respect to this U.S.
  GAAP difference.                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | s. | Companys
  share in Israeli - U.S. GAAP differences relating to associated companies                                                                                                              
| |    |                                                                                                                                                                                                    
| |    | Following is a
  reconciliation of the Companys share in the profits (loss) of its associated
  companies, as reported under Israeli GAAP, to its share in such profits
  (loss), under U.S. GAAP:

|                                                                                 |  | Year ended
  December 31    |            
|-------------------------------------------------------------------------------- |  | --------------------------- | -----------
|                                                                                 |  |                             |            
|                                                                                 |  | 2001                        |            
|                                                                                 |  |                             |            
|                                                                                 |  | Adjusted
  NIS in thousands |            
|                                                                                 |  |                             |            
|                                                                                 |  |                             |            
|Share in profits (loss) of
  associated
       companies, net, as reported under |  |                             |            
|Israeli
  GAAP                                                                   |  |                             | (1)
  1,185
|Effect of the treatment of
  the
       following items under U.S. GAAP:         |  |                             |            
|Cancellation of reduction in
            impairment
  provision                  |  |                             |            
|Employee stock-based awards                                                      |  |                             | (390       
|Issuance
  of shares by a
            development stage
  subsidiary             |  |                             | (87        
|Goodwill
  amortization                                                          |  |                             |            
|Tax effect in respect of
  Israeli -                                             |  |                             |            
|U.S. GAAP differences                                                            |  |                             | 120        
|Other                                                                            |  |                             | (176       
|                                                                                 |  |                             |            
|Share in profits (losses)
  of associated
       companies, net, under U.S. GAAP |  |                             | 652        
|                                                                                 |  |                             |            

| |  | 1) | Before impairment
  provision with respect to investment in associated company, which was
  reclassified, under Israeli GAAP, as part of share in profits (loss) of
  associated company.                                                                                                                                                                                                      
| |  | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                
| |  | 2) | Under Israeli GAAP, in
  accordance with Clarification No. 1 of the IASB No. 15 (see also note 1e(4)
  and (3d), the Company reduced the impairment provision in respect of this
  investment in an associated company by adjusted NIS 499,000  in respect of
  the losses for the period from July 1, 2003 through the end of the year.  Under U.S GAAP. Such provision cannot be
  reversed.

F-96

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 - | RECONCILIATION
  BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE UNITED
  STATES(continued):
|--------- | ------------------------------------------------------------------------------------------------------------------

| | t. | Recognition
  of profits on building contractual work                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Under Israeli GAAP, profits
  from contractual work involving the construction of buildings is recognized
  by the percentage of completion method, if the state of completion has
  reached at least 25% and certain other conditions are met.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Under U.S. GAAP, a
  completion rate of 25% is not required in order to commence recognition of
  such profits, although it is necessary to have the ability to make reliable
  estimates regarding the stage of completion revenues and costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | No quantifiable U.S. GAAP
  difference exists as of, and for the years ended on, December 31, 2001, 2002
  and 2003 in relation to this potential U.S. GAAP difference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | u. | Investment
  in subsidiary of an acquired company designated for sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | As stated in note
  2a(2)(a), as of the acquisition date of BTI - November 14, 2002 - a
  subsidiary of BTI was designated as held for sale.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Under Israeli GAAP,
  consolidation of a temporarily controlled subsidiary is prohibited. Therefore,
  the consolidated financial statements do not include the assets and
  liabilities or the results of operations of the acquired subsidiary held for
  sale.  Rather, this subsidiary is
  presented in the balance sheet at its fair value, less cost to sale, in a one
  line item investment in subsidiary designated for sale, among accounts
  receivable.                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Under U.S. GAAP, in
  accordance with the provisions of FAS 144 (Accounting for the
  Impairment or Disposal of Long-Lived Assets) a newly acquired subsidiary to
  be disposed of by sale, shall be recorded based on its fair value, less cost
  to sale, at the acquisition date (as under Israeli GAAP); nevertheless, under
  U.S. GAAP, such subsidiary needs to be consolidated in the consolidated
  financial statements.  The assets and
  liabilities of the subsidiary to be disposed of shall be presented separately
  in the asset and liability sections, respectively, in the consolidated
  balance sheet.  Following are the
  major classes of assets and liabilities of the said subsidiary, classified as
  held for sale as of December 31, 2002:

|                                                                         |  | Adjusted NIS |       
|------------------------------------------------------------------------ |  | ------------ | ------
|                                                                         |  |              |       
|                                                                         |  | in thousands |       
|                                                                         |  |              |       
|Current assets                                                           |  |              | 12,108
|                                                                         |  |              |       
|                                                                         |  |              |       
|Current liabilities                                                      |  |              | 7,841 
|                                                                         |  |              |       
|                                                                         |  |              |       
|Net amount as presented in
  the balance
       sheet under Israeli GAAP |  |              | 4,267 
|                                                                         |  |              |       

F-97

---

---

BARAN GROUP LTD.(An Israeli
Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 - | RECONCILIATION
  BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE UNITED
  STATES(continued):
|--------- | ------------------------------------------------------------------------------------------------------------------

| | v. | Change
  from the cost method of accounting to the consolidation method                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | In November 2000, the
  Company invested adjusted NIS 494,000 in the share capital of Mobipower
  B.V., representing 10 % of Mobipower B.V.s outstanding shares.  Through to October 31, 2002, the Company
  accounted for this investment under the cost method.  Commencing from October 2002, as a
  result of the acquisition of a further 90% of the share capital of Mobipower
  B.V., in consideration of adjusted NIS 2,178,000 in cash and adjusted NIS
  494,000 in loans, the Company changed
  its method of accounting for this investment from the
  cost method to the consolidation method.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | Under U.S. GAAP, a change
  from the cost method to the consolidation method requires adjustment of the
  financial statement retroactively in order to apply the equity method to the
  prior cost basis investment (i.e. the 10% share investment), while under
  Israeli GAAP, such adjustment is not accepted.                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | Without the additional
  acquisition, but after retroactive application of the equity method, the
  balance as of December 31, 2002 of the 10% investment in Mobipower B.V.
  stands at zero.  Under Israeli GAAP,
  the balance of the investment, representing its cost basis, amounts to
  adjusted NIS 494,000.  In addition,
  under U.S. GAAP, the balance of the goodwill at December 31, 2002 with
  respect to Mobipower is adjusted NIS 2,178,000, while under Israeli GAAP, it
  amounts to adjusted NIS 2,629,000.  As
  to impairment of the goodwill in 2003, see k above.                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | The U.S. GAAP consolidated
  financial statements for the year 2001 have been adjusted retroactively to
  reflect the adoption of the equity method.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | The effect of such
  adjustments on the consolidated statement of income (loss) for 2001, under
  U.S. GAAP, is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

| |                                                 |  | As previously
  reported  |        | Effect of
  restatement |  | As reported in
  these financial
  statements |      
| | ----------------------------------------------- |  | ------------------------- | ------ | ----------------------- |  | --------------------------------------------- | -----
| |                                                 |  |                           |        |                         |  |                                               |      
| |                                                 |  | Adjusted NIS in thousands |       
| |                                                 |  |                           |       
| |                                                 |  |                           |       
| | Share in gains of
  associated
       companies |  |                           | 652    |                         |  |                                               | (266 
| |                                                 |  |                           |        |                         |  |                                               |      
| | Net income                                      |  |                           | 51,976 |                         |  |                                               | (266 
| |                                                 |  |                           |        |                         |  |                                               |      
| | EPS:                                            |  |                           |        |                         |  |                                               |      
| | Basic                                           |  |                           | 7.44   |                         |  |                                               | (0.04
| |                                                 |  |                           |        |                         |  |                                               |      
| | Diluted                                         |  |                           | 6.88   |                         |  |                                               | (0.04
| |                                                 |  |                           |        |                         |  |                                               |      

F-98

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 - | RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN
  ISRAEL AND IN THE UNITED STATES (continued):
|--------- | -----------------------------------------------------------------------------------------------------------------

| | w. | Guarantees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The Company
  has granted guarantees to a bank in favor of its employees loans (see also
  note 19k).  As of December 31, 2003
  the total amount guaranteed was NIS 283,500.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Under U.S.
  GAAP in accordance with FIN 45, the Company recognized the guarantees based
  of their fair value of such guarantees as of December 31, 2003 is NIS 2,970.
  There is no such requirement under Israeli GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | x. | Pro forma financial information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The
  following unaudited pro forma data summarizes the results of operations for
  the period indicated as if the o2 and Mobipower New B.V acquisitions had been
  completed as of the beginning of the periods presented.  The unaudited pro forma data gives effect
  to actual operating results prior to the November 14, 2002 and October 30,
  2002 acquisitions, respectively, adjusted to include the pro forma effect of
  adjustments, including amortization of intangibles, deferred stock
  compensation costs, and the tax effects of the pro forma adjustments.  These pro forma amounts do not purport to
  be indicative of the results that would have actually been obtained if the
  acquisition had occurred as of the beginning of the periods presented or that
  may be obtained in the future:

| |                                                                                                                                                                                |  | Year ended
  December 31                                 |          
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------------- | ---------
| |                                                                                                                                                                                |  |                                                          |          
| |                                                                                                                                                                                |  | 2001                                                     |          
| |                                                                                                                                                                                |  |                                                          |          
| |                                                                                                                                                                                |  | Adjusted
  NIS
  (in thousands,
  except per share data) |          
| |                                                                                                                                                                                |  |                                                          |          
| |                                                                                                                                                                                |  | (Unaudited)                                              |          
| |                                                                                                                                                                                |  |                                                          |          
| | Revenues                                                                                                                                                                       |  |                                                          | 1,520,064
| |                                                                                                                                                                                |  |                                                          |          
| | Net loss for
  the year:                                                                                                                                                       |  |                                                          |          
| | Net
  loss from continuing operations                                                                                                                                          |  |                                                          | (24,812  
| | Net
  loss from discontinuing operations                                                                                                                                       |  |                                                          | (1,727   
| |                                                                                                                                                                                |  |                                                          |          
| | Net loss for
  the year                                                                                                                                                        |  |                                                          | (26,539  
| |                                                                                                                                                                                |  |                                                          |          
| | Loss per
  share :                                                                                                                                                             |  |                                                          |          
| | Continuing
  operations  basic and diluted                                                                                                                                    |  |                                                          | (3.33    
| | Discontinuing
  operations  basic and diluted                                                                                                                                 |  |                                                          | (0.24    
| |                                                                                                                                                                                |  |                                                          |          
| | Loss per
  share  basic and diluted                                                                                                                                           |  |                                                          | (3.57    
| |                                                                                                                                                                                |  |                                                          |          
| | Weighted
  average numbers of shares issued and
       outstanding-net of Companys shares held by
       subsidiaries used in computation of basic
  earning
       per share |  |                                                          | 7,452    
| |                                                                                                                                                                                |  |                                                          |          

F-99

---

---

BARAN GROUP LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 20 - | RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN
  ISRAEL AND IN THE UNITED STATES (continued):
|--------- | -----------------------------------------------------------------------------------------------------------------

| | y. | Recently issued accounting pronouncement in the United States of
  America:
| | -- | ---------------------------------------------------------------------------
| |    |                                                                            
| |    | 1)                                                                         
| |    |                                                                            
| |    |                                                                            
| |    |                                                                            
| |    |                                                                            
| |    |                                                                            
| |    | 2)                                                                         
| |    |                                                                            
| |    |                                                                            
| |    |                                                                            
| |    |                                                                            
| |    |                                                                            
| |    |                                                                            

F-100

---

---

BARAN GROUP LTD.(An Israeli Corporation)
APPENDIX I

DETAILS OF
SUBSIDIARIES, PROPORTIONATELY CONSOLIDATED COMPANIES,
PROPORTIONATELY CONSOLIDATED JOINT VENTURES AND ASSOCIATED COMPANIES
AS OF DECEMBER 31, 2003:

|Name of
  company                                                                                                                       |  | Percentage
  shareholding
|--------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------
|                                                                                                                                        |  |                          
|Subsidiaries:                                                                                                                           |  |                          
|Baran Projects Construction
  Ltd. (hereafter - Baran Construction)                                                                     |  | 100                      
|Baran Inbar Projects (1987)
  Ltd. (hereafter - Inbar Projects)  99% owned
       directly and 1% owned through Baran
  Construction   |  | 100                      
|Baran Advanced Technologies
  (1986) Ltd. (hereafter - Baran Technologies)                                                              |  | 100                      
|Baran Technology Products Management
  and Marketing Ltd. (hereafter - Baran Management)     Management)                                |  | 100                      
|Baran Industries (91) Ltd.
  (hereafter - Baran Industries)                                                                             |  | 100                      
|Baran International
  Energies Ltd. (hereafter - Baran Energies)                                                                        |  | 100                      
|Baran  Raviv Telecom Ltd.
  (hereafter - Baran Raviv)  50% owned directly
       and 50% owned through Baran Construction             |  | 100                      
|Yesodot Barniv Ltd. (since
  2003)  through Baran Raviv Telecom                                                                        |  | 80                       
|Baran Infrastructure and
  Construction Ltd. (hereafter - Baran Infrastructure)                                                         |  | 100                      
|Baran Engineering and
  Projects (1983) Ltd. (hereafter - Baran Engineering)
       (formerly  Baran Petrochemical Engineering
  Ltd.) |  | 100                      
|Enco Systems Projects
  (1997) Ltd. (hereafter - Enco) - through Baran Industries                                                       |  | 100                      
|A. Etzion Consultants and
  Engineers Ltd. (hereafter - A. Etzion) - through Enco                                                       |  | 100                      
|Mobipower Ltd. (former TPS)                                                                                                             |  | 63.64                    
|InTime Software Systems
  Ltd. - through Baran Engineering (since 2003)                                                                 |  | 50                       
|Mobipower B.V. - through
  Mobipower Ltd.                                                                                               |  | 100                      
|B & W Projects Inc.
  (hereafter - B&W)                                                                                                 |  | 100                      
|Barantec Inc. (hereafter -
  Barantec) - through Baran Technologies                                                                     |  | 100                      
|Notev Management and
  Operation Ltd. (hereafter - Notev)                                                                               |  | 100                      
|H.A.J.I. Ltd. (hereafter -
  H.A.J.I.) - through Baran Energies                                                                         |  | 100                      
|Industrial Centers E.O.D.
  Ltd. (hereafter - E.O.D.) - through Baran Energies                                                          |  | 50                       
|Baran Group B.V. (hereafter
  - Group B.V.) - through Baran Group                                                                       |  | 100                      
|Baran Raviv (Netherlands)
  International B.V. (hereafter  Baran Raviv B.V.) -
       through Baran Raviv                              |  | 100                      
|Baran Raviv GmbH - through
  Baran Raviv B.V.                                                                                           |  | 100                      
|LEAD Control Ltd.                                                                                                                       |  | 50.1                     
|Baran Raviv Telecom Africa
  - through Baran Raviv                                                                                      |  | 100                      
|Westmontage GmbH (hereafter
  - Westmontage)  through Group B.V.                                                                       |  | 54.9                     
|Baran Raviv Telecom
  (Thailand) Limited - through Baran Raviv                                                                          |  | 100                      
|Baran Telecom Inc.                                                                                                                      |  | 100                      
|Proportionately
  Consolidated Companies:                                                                                               |  |                          
|Nejeva Holding B.V. -  through Group B.V.                                                                                               |  | 50                       
|Nes-Pan Ltd. (hereafter -
  Nes-Pan) - through Baran Management                                                                         |  | 50                       
|A.R. - A.D.I.R.
  Constructions Ltd. (hereafter - A.R. - A.D.I.R.)                                                                      |  | 50                       
|Meissner - Baran Ltd.
  (hereafter  Meissner - Baran) - through Baran Industries                                                       |  | 46.
  5                  
|Baran Mer International
  Telecommunications, Technology, Industry and Trade Ltd.
       (hereafter - Baran Mer) - through Baran Raviv  |  | 50                       
|Green Anchors Ltd. -
  through Nas Pan                                                                                                  |  | 25                       
|Carmel Desalination Limited                                                                                                             |  | 33                       
|Mal Nes KFT  - 
  through Nes Pan                                                                                                       |  | 22.5                     
|Proportionately
  Consolidated Joint Ventures:                                                                                          |  |                          
|A.A.B. Joint Venture  Nachshonim Project (hereafter -
  Nachshonim)                                                                   |  | 33.33                    
|Joint Venture Dagan Areas
  (hereafter - Dagan Areas)                                                                                   |  | 25                       
|Associated
  Companies:                                                                                                                 |  |                          
|Tefen Industrial
  Engineering and System Analysis Ltd. (hereafter - Tefen) - through
       Baran Industries                           |  | 31.29                    
|A.L.D. - Advanced Logistics
  Developments Ltd. (hereafter - A.L.D.)                                                                    |  | 50.5                     

|(1) | Percentage of control 
  60%. 
|--- | -------------------------------
|(2) | Percentage of control 
  50%. 
|(3) | Percentage of control 
  33.3%

F-101

---

---

BARAN GROUP LTD.(An Israeli Corporation)
APPENDIX II

VALUATION AND
QUALIFYING ACCOUNTS

|                                                      |  | Three
  years ended December 31, 2003 |  
|----------------------------------------------------- |  | ------------------------------------- | -
|                                                      |  |                                       |  
|Column A                                              |  | Column B                              |  
|                                                      |  |                                       |  
|                                                      |  | Balance at
 
  beginning
  of year    |  
|                                                      |  |                                       |  
|Description                                           |  |                                       |  
|Allowance for doubtful
  accounts:                    |  |                                       |  
|Adjusted
  NIS (in thousands):                        |  |                                       |  
|Year
  ended December 31, 2001                        |  | 304                                   |  
|                                                      |  |                                       |  
|Year
  ended December 31, 2002                        |  | 2,558                                 |  
|                                                      |  |                                       |  
|Year
  ended December 31, 2003                        |  | 7,632                                 |  
|                                                      |  |                                       |  
|                                                      |  |                                       |  
|Valuation allowance for
  deferred tax
       assets: |  |                                       |  
|Adjusted
  NIS (in thousands):                        |  |                                       |  
|Year
  ended December 31, 2001                        |  | (5,336                                | )
|                                                      |  |                                       |  
|Year
  ended December 31, 2002                        |  | (11,007                               | )
|                                                      |  |                                       |  
|Year
  ended December 31, 2003                        |  | (16,497                               | )
|                                                      |  |                                       |  
|Warranty provision                                    |  |                                       |  
|Adjusted
  NIS (in thousands):                        |  |                                       |  
|Year
  ended December 31, 2001                        |  | 21,643                                |  
|                                                      |  |                                       |  
|Year
  ended December 31, 2002                        |  | 21,182                                |  
|                                                      |  |                                       |  
|Year
  ended December 31, 2003                        |  | 10,762                                |  
|                                                      |  |                                       |  

F-102

---

---

|                     |               
|-------------------- | --------------
|LION, ORLITZKY & CO. | MOORE STEPHANS

# AUDITORS REPORT
To the Shareholders of Tefen  Industrial Engineering And System Analysis Ltd.

We have audited the consolidated
balance sheets of Tefen  Industrial Engineering And System Analysis Ltd. (hereafter
 the Company) as of December 31, 2003 and 2002, and related consolidated statements
of income, changes in shareholders equity and cash flows 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 audit.

We did not audit the financial
statements of Tefen USA Ltd. as of December 31, 2003 and 2002 and for each of the three
years in the period ended December 31, 2003, which were prepared in accordance with
accounting principles generally accepted in the United States.  We audited the
adjustments to convert such statements to generally accepted accounting principles in
Israel for purposes of inclusion in the consolidated financial statements.  These
financial statements reflect total assets of 44% and 48% of the related consolidated
totals as of December 31, 2003 and 2002, respectively, and total revenues of 58%, 64% and
49% of the related consolidated totals for each of the three years in the period ended
December 31, 2003, respectively.  Those statements were audited by other auditors
whose report thereon has been furnished to us, and our opinion expressed herein, insofar
as it relates to the amounts included for Tefen USA. Ltd. under accounting principles in
the United States, is based solely on the report of the other auditors. Additionally, we
did not audit the financial statements of Tefen Ltd. as of December 31, 2003 and 2002 and
for each of the three years in the period ended December 31, 2003, which were prepared in
accordance with accounting principles generally accepted in the United Kingdom.  We
audited the adjustments to convert such statements to generally accepted accounting
principles in Israel for purposes of inclusion in the consolidated financial statements.
 These financial statements reflect total assets of 16% and 13% of the related
consolidated totals as of December 31, 2003 and 2002, respectively, and total revenues of
18%, 16% and 16% of the related consolidated totals for each of the three years in the
period ended December 31, 2003, respectively.  Those statements were audited by other
auditors whose report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for Tefen Ltd. under accounting principles
in the United Kingdom, is based solely on the report of the other auditors.

We conducted our audits with auditing
standards generally accepted in Israel and in the United State of America including those
prescribed by the Israeli Auditors (Mode of Performance) Regulation, 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 statements presentation. We believe that our
audits, and the reports of the other auditors, provide a reasonable basis for our opinion.

In our opinion, based upon our audits
and on the reports of the above-mentioned other auditors referred to above, the 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 consolidated
results of operations, changes in shareholders equity and cash flows for each of the
three years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in (GAAP) Israel.

Accounting principles generally
accepted in Israel vary in certain respects from accounting principles generally accepted
in the United States as allowed by item 18 to Form 20-F. The application of the latter
would have affected the determination of consolidated income for each of the three years
in the period ended December 31, 2003, and the determination of shareholders equity
as of December 31, 2003 and 2002 to the extent summarized in our letter dated March 22,
2004 in respect thereof.

As explained in note 2, the
consolidated financial statements referred to above 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.

Ramat-Gan, Israel,
   March 22, 2004.

| |  | Sincerely yours,LION, ORLITZKY & CO.
Certified Public Accountants (Isr.)
| |  | ------------------------------------------------------------------------

F-103

---

---

MOORE STEPHENS

Independent auditors
Report to the Board of Directors
and Shareholders of Tefen Limited

We have audited the accompanying balance sheets of Tefen Limited as of
December 31st, 2003 and 2002 and the related statements of operations and
changes in shareholders equity for the years ended December 31st, 2003 and
2002. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those Standards require that we plan and perform
the audits 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 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 Tefen limited as of
December 31st, 2003 and 2002, and the results of its operations for the years
ended December 31st, 2003, and 2002 in conformity with accounting principles
generally accepted  in the United
Kingdom.

|St. Pauls
  House, | MOORE
  STEPHENS       
|------------------- | -----------------------
|London, EC4P
  4BN  |                        
|                    | Chartered
  Accountants
|                    | Registered
  Auditor   

21st May 2004

F-104

---

---

MOORE STEPHENS

Independent auditors
Report to the Board of Directors
and Shareholders of Tefen Limited

We have audited the accompanying balance sheets of Tefen Limited as of
December 31st, 2002 and 2001 and the profit and loss accounts, cash
flow statements and movements in shareholders funds for the years ended
December 31st, 2002 and 2001. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those Standards require that we plan and perform
the audits 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 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 Tefen limited as of
December 31st, 2002 and 2001, and the results of its operations for
the years ended December 31st, 2002, and 2001 in conformity with
accounting principles generally accepted 
in the United Kingdom.

|St. Pauls
  House, | MOORE
  STEPHENS       
|------------------- | -----------------------
|London, EC4P
  4BN  |                        
|                    | Chartered
  Accountants
|                    | Registered
  Auditor   

27th  April 2004

F-105

---

---

Atkinson & Co., Ltd.

REPORT
OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Tefen USA, Ltd.

We have audited the accompanying balance
sheet of Tefen USA, Ltd. (a New Mexico Corporation) as of December 31, 2001,
and the related statements of operations and retained earnings and cash flows
for the year then ended.  These
financial statements are the responsibility of the Companys management.  Our responsibility is to express an opinion
on these financial statements based on our audit.

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

In our opinion, based on our audit, the
financial statements referred to above present fairly, in all material
respects, the financial position of Tefen USA, Ltd. as of December 31, 2001,
and the results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States
of America.

|                                            | Atkinson & Co., Ltd.
|------------------------------------------- | --------------------
|                                            |                     
|Albuquerque, New Mexico
  February 21, 2002 |                     

F-106

---

---

Atkinson & Co., Ltd.

REPORT
OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Tefen USA, Ltd.

We have audited the accompanying balance
sheet of Tefen USA, Ltd. (a New Mexico Corporation) as of December 31, 2002,
and the related statements of operations and retained earnings and cash flows
for the year then ended.  These
financial statements are the responsibility of the Companys management.  Our responsibility is to express an opinion
on these financial statements based on our audit.

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

In our report dated February 12, 2003 we
expressed an opinion that the 2002 financial statements fairly presented the
financial position, results of operations, and cash flows in conformity with
accounting principals generally accepted in the United States of America,
except for effects of including a proportional share of the assets,
liabilities, revenues and expenses of its investee Tefen IT, LLC. As described
in note A, the Company has changed its method of accounting for this investment
and restated its 2002 financial statements to conform with accounting
principals generally accepted in the United States of America. Accordingly, our
present opinion on the 2002 financial statements, as presented herein, is
different from that expressed in our previous report.

In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial position
of Tefen USA, Ltd. as of December 31, 2002, and the results of its operations
and its cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.

|                                            | Atkinson & Co., Ltd.
|------------------------------------------- | --------------------
|                                            |                     
|Albuquerque, New Mexico
  February 11, 2004 |                     

F-107

---

---

Atkinson & Co., Ltd.

REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Tefen USA, Ltd.

We have audited the accompanying consolidated
balance sheet of Tefen USA, Ltd. (a New Mexico Corporation) as of December 31,
2003, and the related statements of operations and retained earnings and cash
flows for the year then ended.  These
financial statements are the responsibility of the Companys management.  Our responsibility is to express an opinion
on these financial statements based on our audit.

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

In our opinion the financial statements
referred to above present fairly, in all material respects, the financial
position of Tefen USA, Ltd. as of December 31, 2003, and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.

Atkinson
& Co., Ltd.

Albuquerque, New Mexico
February 11, 2004

F-108

---

---

BAKER TILLY OREN HOROWITZ

REPORT OF INDEPENDENT AUDITORS

To
the shareholders of A.L.D Advanced Logistics Developments Ltd..

We
have audited the consolidated balance sheets of A.L.D Advanced Logistics
Developments Ltd. (the Company) as of December 31, 2003 and 2002 and the
related consolidated statements of income, changes in shareholders equity and
cash flows 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
did not audit the financial statements of the subsidiary  Qualitest Ltd.,
whose assets included in consolidation constitute approximately 16% and 8% of
the total consolidated assets as of December 31, 2003 and 2002 and whose
revenues included in consolidation constitute approximately 40%, 20% and 18% of
the total consolidated revenues for the years ended December 31, 2003,
2002 and 2001. The financial statements of this subsidiary were audited by
another independent auditors, whose reports have been furnished to us, and our
opinion, insofar as it relates to amounts included for that company, is based
on the report of this independent auditors.

Further
more, we did not audit the financial statements of the subsidiary  Sohar Inc.,
as of December 31, 2003 and 2002 and for the three years ended December 31,
2003 which were prepared in accordance with accounting principles generally
accepted in the United States. We audited the adjustments to convert such
statements to generally accepted accounting principles in Israel for purposes
of inclusion in the consolidated financial statements. These financial
statements reflect total assets of 19% and 12% of the related consolidated
totals as of December 31, 2003 and 2002, respectively, and total revenues of
29%, 27% and 13% of the related consolidated totals for the three years ended
December 31, 2003, respectively. Those statements were audited by other
auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for Sohar Inc.
under accounting principles in the United States, is based solely on the report
of the other auditors.

We
conducted our audits in accordance with auditing standards generally accepted
in Israel and in the 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 annual financial
statements presentation. We believe that our audit and the reports of other
independent auditors provides a reasonable basis for our opinion.

In
our opinion, based upon our audits and the reports of the other independent
auditors referred to above, the aforementioned financial statements present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2003 and 2002 and the consolidated results of its
operations, changes in shareholders equity and its cash flows for each of the
three years in the period ended December 31, 2003, in conformity with generally
accepted accounting principles (GAAP) in Israel.

Accounting
principles generally accepted in Israel vary in certain respects from accounting
principles generally accepted in the United States and as allowed by item 18 to
the Form 20-F. The application of the latter would have affected the
determination of consolidated income for each of the three years in the period
ended December 31, 2003, and the determination of shareholders equity as of
December 31, 2003 and 2002 to the extent summarized in note 20 to the
consolidated financial statements.

As
explained in note 2a, the consolidated financial statements referred to above
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.

s / Oren
Horowitz C.P.A (Isr)

March
23, 2004

F-109

---

---

Goodrich, Goodyear
& HindsAn Accountancy Corporation

INDEPENDENT
AUDITORS REPORT

The Board of Directors
SoHar, Inc.
Culver City, California

We
have audited the accompanying balance sheer of SoHar, Inc., as of December 31,
2003, and the related statements of income, stockholders equity, and cash
flows for the year then ended.  These
financial statements are the responsibility of the Companys management.  Our responsibility is to express an opinion
on these financial statements based on our audit.

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

As
discussed in Note 8 to the financial statements, certain minority shareholders
have asserted that $55,000 in liabilities in excess of actual obligations to
related companies was recognized in the financial statements of the
Company.  The Company disagrees with
their interpretation.  We were unable to
obtain sufficient audit evidence to determine if the recorded liability was in
excess of the actual obligations to the related companies.  If the $55,000 liability was not recognized,
the Companys income, net of taxes, would increase approximately $31,000.

In
our opinion, except for the effect of such adjustments, if any, as might have
been determined to be necessary had we been able to satisfy ourselves about the
items discussed in the prior paragraph, the financial statements referred to
above present fairly, in all material respects, the financial position of
SoHar, Inc., as of December 31, 2003, and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.

Long Beach, California
February 19, 2004.

F-110

---

---

Goodrich, Goodyear & HindsAn Accountancy Corporation

INDEPENDENT
AUDITORS REPORT

The Board of Directors
SoHar, Inc.
West Covina, California

We
have audited the accompanying balance sheet of SoHar, Inc., as of December 31,
2002, and the related statements of income, stockholders equity, and cash
flows for the year then ended.  These
financial statements are the responsibility of the Companys management.  Our responsibility is to express an opinion
on these financial statements based on our audit.

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

In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of SoHar, Inc., as of December 31,
2002, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.

s /
Goodrich, Goodyear & Hinds

Long Beach, California
March 15, 2003

F-111

---

---

Windes & McClaughkyAccountancy
Corporation
Certified Public Accountants & Consultants

INDEPENDENT
AUDITORS REPORT

To the Board of Directors of
SoHar, Inc.

We
have audited the accompanying balance sheet of SoHar, Inc., as of December 31,
2001, and the related statements of income and comprehensive loss,
stockholders equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Companys management.  Our responsibility is to express an opinion
on these financial statements based on our audit.

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

In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of SoHar, Inc., as of December 31,
2001, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.

|Long Beach, California
|----------------------
|February 19, 2002     

F-112

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|LOGO |                                                                                                                                                    
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                    
|     | Kesselman & KesselmanCertified Public Accountants (Isr)
  6 Yaski StreetBeer Sheva 84222 IsraelTelephone +972-8-6277020
  Facsimile +972-8-6276351

REPORT OF INDEPENDENT AUDITORS

To the shareholders of

QUALITEST LTD.

We have audited the balance sheets of Qualitest Ltd. (hereafter -the Company) as of
December 31, 2002 and 2003 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, 2003. Thesefinancial
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 accordance with 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. The audit also includes assessing the
accounting principles used and significant estimates made by the Companys
Board of Directors and management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of the other
independent auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of
December 31, 2002 and 2003 and the results of operations, changes in
shareholders equity and cash flows for each of the three years in the 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 and as allowed by Item 18 to Form 20-F. The application of the latter
would have affected the determination of net income for each of the three years
in the period ended December 31, 2003 and the determination of
shareholders equity at December 31, 2002 and 2003 to the extent
summarized in note 20 to the financial statements.

As explained in note 2, the financial statements referred to above
are presented in values adjusted for the changes in the general purchasing
power of Israeli currency, in accordance with pronouncements of the Institute
of Certified Public Accountants in Israel.

|Beer Sheva,
  Israel | Kesselman
  & Kesselman              
|-------------------- | -------------------------------------
|June
  24, 2004      | Certified
  Public Accountants (Isr.)

F-113

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|DELOITTE LOGO                                                 | Brightman Almagor
  1 Azrieli CenterTel Aviv
  67021
  P.O.B. 16593, Tel Aviv 61164Israel
  Tel:      +972 (3) 608 5555
  Fax:     +972 (3) 609 4022
  info@deloitte.co.il
  www.deloitte.com
|------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|INDEPENDENT AUDITORS REPORT                                 
|To the Management Committee and Joint Venturers              
|A.A.B. JOINT VENTURE - ABB SUSA / A.
  ARENSON / BARAN GROUP: |                                                                                                                                                                                              

We have audited the accompanying balance
sheets of A.A.B. JOINT VENTURE - ABB SUSA / A. ARENSON / BARAN GROUP (the
Joint Venture) as of December 31, 2003 and 2002, and the related statements
of operations and cash flows for each of the two years in the period ended December
31, 2003 and for the period from inception (April 5, 2001) to December 31,
2001. These financial statements are the responsibility of the Joint Ventures
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, including
those prescribed by the Israeli Auditors Regulations (Mode of performance),
1973, as well as in the United States of America. 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 Joint Venture
as of December 31, 2003 and 2002, and the results of operations and cash flows
for each of the two years in the period ended December 31, 2003 and for the
period from inception (April 5, 2001) to December 31, 2001, in accordance 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. The
application of the latter would not have materially affected the determination
of the Joint Venturers capital as of December 31, 2003 and 2002 or net income for
each of the two years in the period ended December 31, 2003 and for the period
from inception (April 5, 2001) to December 31, 2001.

As explained in Note 2A, these financial statements are presented in
values adjusted for changes in the general purchasing power of the Israeli
currency, in accordance with pronouncements of the Institute of Certified
Public Accountants in Israel.

Brightman Almagor & Co.
Certified Public Accountants
A member of Deloitte Touche Tohmatsu

Tel Aviv, IsraelMarch
7, 2004

|Audit  Tax 
  Consulting  Financial Advisory  | A member firm
  of
  Deloitte Touche Tohmatsu
|------------------------------------------------- | ---------------------------------------------

F-114

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|Brightman
  Almgor | Deloitte
  & Touche
|------------------ | -------------------

Independent Auditors Report
To The Shareholders of
Meissner-Baran Ltd.

We have the accompanying balance sheets of Meissner-Baran Ltd. (the
Company) as of December 31, 2002 and 2001 and the related statements of
operations, changes in shareholders equity and cash flows for each of the
three years in the period ended December 31, 2002. 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 the United States of America, and in Israel, including those
prescribed by the Israeli Auditors regulations (Mode of Performance), 1973.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements
presentation, we believe that our audits provides a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present
fairly, in all respects, the financial position of the Company as of December
31, 2002 and 2001 and results of its operations, its changes in shareholders
equity and its cash flows for each of the 
three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in Israel. Accounting principles
generally accepted in Israel vary in certain respects from accounting
principles generally accepted in the United States of America. The application
of the latter would have affected the determination of the results of
operations of each three years in the period ended December 31, 2002 and determination
os shareholders equity and financial position as of December 31, 2002 and
2001, to the extent summarized in Note 18.

As explained in Note 2b, the aforementioned financial statements are
presents in values adjusted for changes in the general purchasing power of the
Israeli currency, in accordance with Opinions of the Institute of certified
Public Accountants in Israel.

s/Brightman Almagor & Co.
Certified Public Accountants
A member firm of Deloitte Touche Tohmatsu

Tel-Aviv, Israel
March 13, 2003

F-115



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ITEM 19. EXHIBIT INDEX

|Exhibit
  No. |  | Description                                                                                                                                                                                                                                                               
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              |  |                                                                                                                                                                                                                                                                           
|1.1           |  | Articles of
  Association of Baran (translation). (Incorporated by reference to Exhibit 3.1
  of the Registrants F-4 filed with the Commission on October 24, 2002). (*)                                                                                                 
|1.2.1         |  | Memorandum
  of Association of Baran, as amended (translation). (Incorporated by reference
  to Exhibit 3.2 of the Registrants F-4 filed with the Commission on October
  24, 2002). (*)                                                                                 
|3.1           |  | Summary of
  Agreement among Ephraim Goldstein, Aharon Lichtenstein, and Eli Peleg, Baran
  and Baran Industries (91) Ltd., dated July 7, 1998. (Incorporated by
  reference to Exhibit 10.4 of the Registrants F-4 filed with the Commission
  on October 24, 2002). (*)
|3.2           |  | Summary of
  Agreement among Dr. Zigmund Bloveband and Baran, dated January 31, 2000.
  (Incorporated by reference to Exhibit 10.5 of the Registrants F-4 filed with
  the Commission on October 24, 2002). (*)                                                          
|4.1           |  | Agreement
  and Plan of Merger, dated as of June 5, 2002, among Baran Group Ltd., Baran
  Acquisition Sub, Inc., and o2wireless Solutions, Inc. (Incorporated by
  reference to Exhibit 2.1 of the Registrants F-4 filed with the Commission on
  October 24, 2002). (*) 
|4.2           |  | Amendment to
  Agreement and Plan of Merger, dated August 28, 2002 (Incorporated by
  reference to Exhibit 2.1.1 of the Registrants F-4 filed with the Commission
  on October 24, 2002). (*)                                                                            
|4.3           |  | Second
  Amendment to Agreement and Plan of Merger, dated September 17, 2002
  (Incorporated by reference to Exhibit 2.1.2 of the Registrants F-4 filed
  with the Commission on October 24, 2002). (*)                                                                  
|4.4           |  | Management
  Consulting Agreement, dated as of June 5, 2002, among Baran and o2wireless.
  (Incorporated by reference to Exhibit 10.3 of the Registrants F-4 filed with
  the Commission on October 24, 2002). (*)                                                       
|4.5           |  | Documentation
  of Loan from Bank Hapoalim Ltd. to Baran (translation). (Incorporated by
  reference to Exhibit 10.6 of the Registrants F-4 filed with the Commission on
  October 24, 2002). (*)                                                                        
|4.6           |  | Documentation
  of Loan from Bank Leumi to Nes-Pan Ltd., dated October 14, 2001
  (translation). (Incorporated by reference to Exhibit 10.7 of the Registrants
  F-4 filed with the Commission on October 24, 2002). (*)                                                 
|4.7           |  | Documentation
  of Loan from Bank Leumi to Baran, dated February 10, 2002 (translation).
  (Incorporated by reference to Exhibit 10.8 of the Registrants F-4 filed with
  the Commission on October 24, 2002). (*)                                                       
|4.8           |  | Rental
  Agreement between Nes-Pan Ltd. and Clal-Investments in Real Estate Ltd.
  (translation). (Incorporated by reference to Exhibit 10.9 of the Registrants
  F-4 filed with the Commission on October 24, 2002). (*)                                                
|4.9           |  | Agreement
  dated February 21, 2002 between D.B.S. Satellite Services (1998) Ltd. and
  Baran Raviv Telecom Ltd. (translation). (Incorporated by reference to Exhibit
  10.10 of the Registrants F-4 filed with the Commission on October 24, 2002).
  (*)               
|4.10          |  | Agreement
  dated March 7, 2000 among T.P.S. Teleparking Systems Ltd., Baran, and Dor
  Chemicals Ltd. (translation). (Incorporated by reference to Exhibit 10.11 of
  the Registrants F-4 filed with the Commission on October 24, 2002). (*)                           

96

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|4.11 |  | Agreement
  dated May 30, 2000 among T.P.S. Teleparking Systems Ltd., Baran, S.M.D.
  Progressive Technologies Ltd., Alron TPS LLC, and Israel Investment LLC
  (translation). (Incorporated by reference to Exhibit 10.12 of the
  Registrants F-4 filed with the Commission on October 24, 2002). (*)
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.12 |  | Warrant to
  Purchase Stock of o2wireless Solutions, Inc. (Incorporated by reference to
  Exhibit 10.13 of the Registrants F-4 filed with the Commission on October
  24, 2002). (*)                                                                                                                   
|8.1  |  | List of
  Baran subsidiaries. (Incorporated by reference to Exhibit 21.1 of the
  Registrants F-4 filed with the Commission on October 24, 2002). (*)                                                                                                                                                  
|10.1 |  | Certification
  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                  
|10.2 |  | Certification
  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                  

(*) Incorporated by reference to the Registrants Form F-4 filed with
the Commission on October 24, 2002

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.

| | BARAN GROUP,
  LTD.
| | -------------------
| |                    
| |                    
| | By:                
| |                    
| |                    

Date: June 28, 2004

97

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CERTIFICATIONS

I, Meir Dor, Chairman of the Board and Chief Executive Officer, certify
that:

|1.  I have reviewed this annual report on Form
  20-F of Baran Group Ltd.(the Company):                                                                                                                                                                                                                                                
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                         
|2.  Based on my knowledge, this annual 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 annual report;     
|                                                                                                                                                                                                                                                                                                                                         
|3.  Based on my knowledge, the financial
  statements, and other financial information included in this annual report,
  fairly present in all material respects the financial condition, results of
  operations and cash flows of the Company as of, and for, the periods presented
  in this annual report;                           
|                                                                                                                                                                                                                                                                                                                                         
|4.  The Companys other certifying officer 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)) and
  internal control over financial reporting (as defined in Exchange Act Rules
  13a-15(f) and 15d-15(f) for the Company and have:
|                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                         

98

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|5.  The Companys other certifying officer and
  I have disclosed, based on our most recent evaluation of internal control
  over financial reporting, to the Companys auditors and the audit committee
  of the Company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 Company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
  Companys internal control over financial reporting.                                                                                                                  

Date:  June 28, 2004

| | /s/ Meir Dor                                               
| | -----------------------------------------------------------
| |                                                            
| | Meir Dor
  Chairman of the Board, Chief
  Executive Officer

99

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CERTIFICATIONS

I, Sasson Shilo, Vice President and Chief Financial Officer, certify
that:

|1.  I have reviewed this annual report on Form
  20-F of Baran Group Ltd. (the Company):                                                                                                                                                                                                                                               
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                         
|2.  Based on my knowledge, this annual 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 annual report;     
|                                                                                                                                                                                                                                                                                                                                         
|3.  Based on my knowledge, the financial
  statements, and other financial information included in this annual report,
  fairly present in all material respects the financial condition, results of
  operations and cash flows of the Company as of, and for, the periods
  presented in this annual report;                           
|                                                                                                                                                                                                                                                                                                                                         
|4.  The Companys other certifying officer 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)) and
  internal control over financial reporting (as defined in Exchange Act Rules
  13a-15(f) and 15d-15(f) for the Company and have:
|                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                         

100

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|5.  The Companys other certifying officer and
  I have disclosed, based on our most recent evaluation of internal control
  over financial reporting, to the Companys auditors and the audit committee
  of the Company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 Company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
  Companys internal control over financial reporting.                                                                                                                  

Date:  June 28, 2004

| | /s/ Sasson
  Shilo                                   
| | -----------------------------------------------------
| |                                                      
| | Sasson Shilo
  Vice President of Finance,
  Secretary

101

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